"The downdraft in natural gas prices over the past few weeks is raising legitimate concerns over activity going forward," Managing Director Mark Urness said in a report. "The downturn in the 2011 strip and unwillingness to hedge, along with uncertain economic conditions, will likely cause E&Ps to cut spending on natural gas programs going into 2011."
In addition to canceling plans in unprofitable plays, producers are shifting gas rigs to oilier, more liquids-rich plays, Urness said.
"Since the end of April 2010, the natural gas count has flattened, and increases since then have been primarily horizontal oil-related programs," Urness said. "We expect the increase in oil drilling in the unconventional and conventional plays will offset declines in natural gas rig count, while still
subduing our previous assumptions about continued increases in the US rig count through 2011."
Urness trimmed his forecast for next year's rig count by 217, or 13%, to 1,703 rigs. Urness noted that gas rigs make up 60% of those currently being run in the US, a share that has been falling as operators shift to liquids and oil.
Baker Hughes said 1,656 rigs were operating in the week ended Friday, about 3% above the prior week and 66% above the corresponding week of last year. But the gas rig count fell by 12 to 973 from the previous week, though it remained well 699 gas rigs operating in the corresponding week of 2009.
In data posted on its website, Baker Hughes said the US rig count bottomed out the week of June 12, 2009, at 876 rigs, of which 685, or 78%, were gas-directed and 183, or 21%, were oil directed.
"We are becoming more concerned about the outlook for US natural gas prices and drilling activity," Urness said. "While inventory builds have slowed and are lower than last year's record highs, we do not see a meaningful increase in natural gas demand as the economic recovery moves at a slow pace."
Current spot gas prices in the $3.80/Mcf range "and the 12-month strip below $5/Mcf do not reveal anything promising for 2011 gas drilling programs," the analyst said, adding that operators will only be drilling for gas so they can hold their leases.
"Operators may continue to hold acreage in the dry gas regions, but we believe that the dry gas rig count peaked in mid-July," Urness said. "With oil sustained above $70/barrel, we expect the shift-to-liquids trend to continue well into 2011."
China Chemical Weekly: http://news.chemnet.com/img/articles/140/1409957_0.pdf
