happycajun

Why Are Natural Gas Producers Expanding Production So Aggressively?

First, a technical correction - you don't "pump" natural gas (or any vapor phase material), you compress it. Gas wells flow or they don't flow - you don't pump them. If the pipeline pressure that you have to overcome to get the gas into the pipeline is higher than the wellhead pressure, then you add compression at the wellhead, downstream from the separators.

Second - the "why" wells are being drilled with prices down is more complex than you characterize. One must look at oil & gas law and how mineral rights are acquired to understand why an oil or gas lease is a "use it or lose it" proposition. When a landowner leases his/her minerals, it is by way of an agreement in written form that stipulates that the lessee has a limited amount of time to drill a well, or the leasehold rights revert back to the land owner. In the Haynesville, for example, it common for leases to provide that the lessee must drill a well in two years, or the lease goes away. There is usually an option to "renew" the lease for an amount of money generally equal to the original lease payment or "bonus" that was the consideration for the lease initially. The lease bonus in the Haynesville has been in the $5,000 to $10,000 per acre range generally. If gas and condensate are produced, then the lessor gets a percentage of the gross production at the wellhead, typically 25% of the volume - which the producer generally markets for the owner, who then gets the $$ that his 1/4 of the gas is sold for.

Now, to put this in an economic context. The basic "unit" being formed in the shales is the section - or a 640 acre nominally square area. This unit is developed by a single horizontal well that is spudded (the surface penetration of the drill bit) near the center of one side of the square, and which goes down vertically to the shale formation, then "kicks" horizontal and runs about a mile - this is the section of the well that is "completed" - where the gas flows from the rock into the tubing, then to the surface.

The lease bonuses for 640 acres is a sunk cost of about $3 - 6 million. A well costs a little more than that. If you don't drill, you lose the lease, or have to pony up another $3-6MM to hold the lease - which you will still lose if you don't drill - all you are buying is time. Having shelled out the $$$ for a lease, and or for a well - it is simple matter of cash flow that you have to generate revenue to produce some return on the investment. The lease also has shut in provisions, which require that a lease be produced once a well is drilled, or it reverts to the land owner - if a lease is shut in more than thirty days - you can lose the lease.

The above is much simplified - but it shows that the economics and risks are more complex than you characterize. This is why the upstream E&P business is best analogized as a game of stud poker - you have to ante up at each stage of the game, and you don't know if you have won or lost until the last card is dealt.