Some of the newest U.S. natural gas wells are depleting at a rate of 50% a year, which is “not a terribly surprising thing,” Patterson-UTI Energy Inc. Chairman Mark Siegel said last week. What is a surprise, he said, is the furious expansion in domestic gas drilling — nearly 32,500 wells were drilled in 2006, compared with less than 17,500 just five years ago.

Siegel, speaking to participants at A.G. Edwards Energy Conference in Boston, said the U.S. land drilling industry, like the rest of the energy sector, has fundamentally changed in the past five years. The Snyder, TX-based services company operates in North America, and its 319 land rigs constitute the largest marketed land rig fleet, followed by Nabors Industries Inc., which has 297 marketed U.S. land rigs.

As the drilling industry has consolidated, Siegel said efficiency has been key as the workload has increased. The number of U.S. gas wells drilled between 1986 and 1999 remained fairly steady, averaging around 7,500 to around 11,000 wells a year. In 2000, however, the dynamics changed: more than 16,000 land gas wells were drilled. Last year, U.S. land wells drilled topped 31,000.

“That is the greatest surprise to me…more than 30,000 wells drilled in mature basins in the United States…that’s a tripling of the industry to keep supply constant,” said Siegel. “The issue is that North American producers are unable to increase supply…We have smaller new wells, with faster depletion rates and declining imports. Supply has remained relatively constant for the last 12 years…Despite significant price changes, a tripling of the commodity price, supply has remained relatively constant.”

Natural gas prices, he noted, averaged $1.87/Mcf between 1986 and 1999.

“For 13 years, there was a very flat line,” said Siegel. “Obviously, there’s been a significant change, and gas prices have been under $5 for the last seven years…the new average is around $5. Now I’m asked constantly if $6 is a terrible price in the natural gas market. We are reminded of the fact that there has been a very large sea change, and it’s important for us to reflect that.”

He said there has been a “fundamental change in the oil and gas markets, changes in participants’ price outlooks. The land drilling industry has fundamentally changed, and we’ve been the beneficiary of those changes.”

Today, he said, the oil services industry is producing new U.S. gas wells “like a manufacturing process.” But even with the increased work, he said, “we’re seeing efficiencies improve 10% from 2004, which really has been an improvement for the customer.”

Still, there was a downturn in the drilling industry last year and into the first quarter of 2007. Many of Patterson-UTI’s North American customers reduced their drilling activities as gas storage levels rose and gas prices fell. However, long-term, the driller doesn’t expect any weakness in the market.

“The expectation is for an increasing number of wells to overcome smaller wells with accelerated depletion,” said Siegel. “Better production methods allow us to take supply out of the ground more quickly.” And that means more wells will be drilled.

With all of the U.S. land rigs “occupied” in 2006, there is “some need” to increase the fleet, and new rigs are expected to arrive later this year. “This is predictable and it will be useful.” But an increase in land rigs is unlikely to change the pricing or supply dynamics, he said.

“We see favorable long-term trends for oil and gas prices” for several reasons, including a drop in imported gas from Canada. “Unfortunately, the easily found, easily imported gas has been taken. There was a 12% decline in 2003, and in 2006, it was down 9% from the peak.” Even the promise of liquefied natural gas (LNG) imports is unlikely to dramatically alter supply, he said. “LNG is a long-term promise that we think will be some help, but not a market-changing event…Cheap energy is unlikely to return…”

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