Sustained low natural gas prices and higher productivity may trigger a wave of industry consolidation similar to the mega mergers in the past decade, oil and gas experts told an audience at the recent IHS Herold 20th Annual Pacesetters Energy Conference in Stamford, CT.

Onshore gas drilling activity remains high, a backlog of wells continues to grow, and companies continue to gain from hedging activities and an influx of capital from joint ventures, all of which are sustaining an oversupply of domestic gas, said Talisman Energy Inc.’s R. Dean Forman, chief economist for planning and commercial. For prices, it “adds up to something that says ‘lower for longer,'” he said.

Exploration and production companies that still need to secure production through drilling, i.e., held by production acreage, may opt to produce gas and sell it at low prices instead of losing their positions, said Foreman. In addition, operators that have moved to more liquids-rich and oily plays still are producing gas, which adds to the abundant supply.

“That’s gas supply that’s not likely to dissipate even in a low-price environment,” said the Talisman executive. In addition, joint ventures have infused more capital into onshore plays that likely will continue to support drilling, he said.

A backlog of 3,000-5,000 gas wells exists in the U.S. onshore that are drilled but not completed, said Foreman. His figures are consistent with recent observations by oilfield services operators Halliburton Co. and Schlumberger Ltd., as well as recent numbers compiled by Barclays Capital (see Daily GPI, Sept. 12; July 25).

Operators today have lowered their expectations for the gas price they can fetch, he said. Producers that previously locked in prices at $5-6/MMBtu “are now happy to lock in $4.70-5.00 two years out,” he said. A decline in gas prices to $3-3.50/MMBtu would lead many to lay down rigs and turn off the spigot. But as prices gained strength, activity — and hence, output — quickly would expand.

Citigroup’s Christopher Miller, who directs global energy investment banking, said low gas prices won’t last forever.

“You know at some point natural gas is going to come back,” he told the audience. And many are taking the matter into their own hands. Producers are working to build gas demand in the United States by securing ethane contracts with chemicals manufacturers, by increasing the market for gas-fueled vehicles both in house and in their networks, and by working on ways to develop gas-to-liquids facilities and liquefied natural gas export facilities. However, “there’s plenty of supply, so I’m not saying that gas prices are going to go through the roof.”

Finding capital to support production growth is presenting a challenge for some producers and an opportunity for the largest operators, said IHS Director of Research Robert Gillon. “More wells, more expensive wells, means the companies that are participating must be better capitalized,” he said. “In recent months, financial markets have not cooperated.”

Commodity prices are a strong determinant of the pace of merger and acquisition activity, said Gillon. And a lack of capital may trigger more industry consolidation.

“A lower price environment would probably stimulate the wave of consolidation that we see coming and make it more hectic…larger…Elevated high prices may defer it.” Companies may want “to be part of a much larger, dividend-paying organization that can increase the capital outlays on the projects…I think a number [of them] will come to that conclusion.”

Acquisitions are especially attractive to the oil majors, said Simmons & Co. International’s Bob Gray, managing director of exploration and production.

“There are some companies out there that give one of the majors something that they can’t build from scratch easily,” he said. “If we see continued weakness in the financial markets, it may be just the old story of compelling valuations.”

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