Natural gas-directed drilling is bound to go up in 2010 as supplies fall, but energy analysts don’t think there will be as many rigs needed to increase supplies.

Gas shale drilling is forecast to jump 50% or more in 2010, even though overall gas activity will be up by only half that (23%), said Tudor, Pickering, Holt & Co. Securities Inc. (TPH) in a note to clients.

“We expect [the] total U.S. rig count to grow 55% over the course of 2010” from an estimated 968 rigs in the last three months of 2009 to 1,500 by the end of 2010, said TPH. However, U.S. drilling activity isn’t expected to increase much beyond 4Q2010 levels, said the TPH analysts. The 2011 year/year (y/y) increase is seen as “mostly a full year of the 2010 recovery.”

Because of the increased use of hydraulic fracturing on shale wells, TPH analysts think there is a “better recovery outlook” for pressure pumping than for drilling rigs. Some energy pundits saw that as an impetus to Baker Hughes Inc., which earlier this week announced it would buy pressure pumping giant BJ Services Inc. (see Daily GPI, Sept. 1).

The coming years’ forecast is “gas price dependent,” said the TPH team. “We are confident 2010 gas prices will rise from current levels, but if it doesn’t reach our $7.50/Mcf forecast level, activity and oil service earnings could under perform our expectations.” Exploration and production companies also may not cooperate and could “sit on their hands more than we expect as [the] gas price improves,” said the analysts. “If this happens, gas price is biased higher than we expect, while an oil service earnings recovery would be delayed.”

Analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) agreed that companies are producing more gas with fewer rigs. According to the STRH analysts, fundamentals support a $7/Mcf gas price in 2010 and an $8 gas price in 2011.

The U.S. gas rig count “needs to increase almost 15% next year to 900 rigs on average to maintain gas market balance, which is below our prior expectation of 975 gas rigs,” wrote STRH analysts. “The lower level of rig activity next year is attributable to better-than-expected well/rig productivity.”

This year “we anticipate a 30%-plus increase in well/rig productivity, which compounds the 24% increase experienced in ’08,” said the STRH team. “Consequently, we now forecast a shallower U.S. gas production decline of almost 3 Bcf/d (5%) y/y by year-end and nearly 5 Bcf/d (8%) peak-to-trough decline by next summer. In ’11, a 20%-plus increase in drilling activity (1,100 average gas rig count) appears necessary to increase production sufficiently to maintain gas market equilibrium.”

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