Gas Production at Record as Shale Puzzle Solved
Comment of the Day

June 15 2011

Commentary by Eoin Treacy

Gas Production at Record as Shale Puzzle Solved

This article by Christine Buurma for Bloomberg may be of interest to subscribers. Here is a section:
Gas may cost an average $4.42 per million Btu in 2011, according to the median of 12 analyst estimates compiled by Bloomberg since early March. A 12 percent rally over the past three weeks amid hotter-than-normal weather and maintenance shutdowns of nuclear power plants is "unsustainable," according to Goldman Sachs Group.

"These factors are transient in nature, and their support to generation demand for natural gas will likely diminish in the coming weeks as the weather normalizes and nuclear power plants come out of maintenance," London-based Goldman analysts Samantha Dart and Johan Spetz said in a note to clients June 13. Goldman recommends selling October 2011 Nymex gas contracts.

Improved drilling methods and increased gas-rich acreage have allowed Range to boost output 54 percent since 2007 while cutting wells by 43 percent, the company said in a June investor presentation. Lease operating costs, which include labor, water hauling, power and maintenance, may fall 34 percent this year from 2008, it said.

Range, based in Fort Worth, Texas, has the second-highest number of permits to drill in Pennsylvania's Marcellus Shale, a rock formation that stretches from West Virginia to New York.
Oklahoma City-based Chesapeake has the most permits in Pennsylvania.

Rig Count
The number of rigs drilling for gas has tumbled from a peak of 1,606 on Aug. 29, 2008, as the recession cut demand for the factory and power-plant fuel, data from Baker Hughes Inc. in Houston show. Gas rigs totaled 879 in the week ended June 10.

U.S. gas production rose 3.3 percent in March to 77.83 billion cubic feet a day, or 2.41 trillion for the month, a record in Energy Department data going back to 1980. The figure represents gross withdrawals, which include gas that's vented, flared or removed in processing, according to the department's monthly report known as EIA-914.

Eoin Treacy's view The USA remains a global leader in the development of energy related technology. The above article details a number of areas where innovative engineering solutions have been found that have succeeded in bring down the cost of producing from unconventional wells. Drilling equipment has been migrating to shale oil wells which offer a more attractive return because of the current high price of oil but the ability of shale gas drillers to continue to produce impressive volumes cannot simply be ignored.

Natural gas prices have been largely rangebound since late 2009 and remain characteristically volatile. In the last year, prices have formed three large downside key reversals rallies near $5, with the most recent a week ago. A sustained move above $5 would be required to indicate a return to medium-term demand dominance.

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