The natural gas industry has faced tight credit markets before and lived with low prices, but never so forcefully at the same time. As a result, the outlook for drilling in the coming year is dicey at best, and the pullback in rigs will accelerate through 2009, Barclays Capital analysts noted in a report.

Barclays analysts affirmed other surveys in recent weeks appearing to indicate that 2009 will not be the year of the drillbit (see Daily GPI, Nov. 25; Nov. 24a; Nov. 24b).

“The credit crisis alone would not likely cut spending sufficiently to pull enough rigs from operation to completely arrest supply growth in 2009,” noted Barclays analysts George Hopley, Biliana Pehlivanova and Michael Zenker. However, combining the financial turmoil with low gas prices is another matter, they said.

If 12-month forward gas prices are sustainable below $7.50/MMBtu at the Henry Hub, “we would expect drilling to moderate,” said the analysts. “At prices sustainably below $7.00, we expect the rig count to fall below the level necessary to keep supply flat (supply additions just matching declines). Now the industry faces both tough capital markets and inhospitable prices.”

Unwinding a drilling program, however, takes time, and rigs in operation today likely were sanctioned six months ago, noted Hopley and his colleagues.

“Yet, producers are paddling upstream,” they wrote. “The momentum to gas-directed drilling is still enormous, with the U.S. rig count still in near-record territory. Drilling sanctioned when prices were well above $10 is still coming to market. Further, a significant number of new rigs are entering operation over the next few quarters.”

Some in the industry are predicting a plunge in gas drilling early next year, but it won’t be that fast, the Barclays team predicted.

“The U.S. rig count is unlikely to drop to the level needed to just maintain U.S. production, a number we peg at 1,250-1,300 rigs, until the second half of 2009,” the analysts said. “This is simply a function of the amount of time required for producers to pull back on their drilling programs, rather than an indication that all drilling in 2009 is cost effective. Indeed, we expect that some unhedged production in 2009 will not be cost effective compared to 2009 spot prices.”

The wildcard: winter weather. A colder-than-normal pattern “could alleviate some of the supply overhang and provide near-term support to prices, which would in turn lessen the urgency of drilling cuts,” Hopley and his team said. However, warm weather could exacerbate the weakness in demand and prices, “forcing producers to take a sharper turn in drilling plans.”

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