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Despite fewer rigs, analysts say gas market still oversupplied

Apr. 04, 2011 9:01 PM ETAQ, DVN, EOG, APA, APC, RRC, SWN, SD, XOM, XTO, CVX, OXY, MRO
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Despite fewer rigs, analysts say gas market still oversupplied

Washington (Platts)--

4 Apr 2011/412 pm EDT/2012 GMT

US natural gas supplies will continue to grow between 4 and 5 Bcf/d in 2011, despite a 10% drop in the gas rig count, investment bank Raymond James said Monday, keeping prices just below $4/Mcf, on average, for the year.

Raymond James' gas analyst Marshall Adkins, a notorious gas bull in years past, joins analysts from Tudor Pickering Holt and Jefferies & Company in predicting continued flush gas supplies and chronic low prices for US markets this year.

Subash Chandra at Jefferies said last week that production information the Energy Information Administration submitted in its 914 survey shows no sign of an output slowdown. "Weather-adjusted production was up 0.17 Bcf/d month-over-month, or 4.78 Bcf/d for the year," Chandra said.

"Although cold weather persisted into early February, most storage data in late February and early March suggest a market 3 Bcf/d oversupplied," TPH noted.

"Nuclear issues and bullish long-term demand dynamics are fun to talk about, but doesn't change the fact [that] we currently have too much gas," said TPH, as it called for sub-$4/Mcf gas this spring and $4/Mcf gas this summer.

Raymond James' Adkins said several factors are keeping production up while the number of rigs drop -- improved drilling efficiencies, resulting in a backlog of wells awaiting completion; and while many gas drillers promote their new efforts as oil or liquids-rich, those wells still deliver significant gas volumes.

Using Louisiana's Haynesville Shale -- now the nation's largest shale producer -- as an example, Adkins pointed out that the markets think expensive Haynesville wells are being drilled to hold acreage by production, when data from the state shows that more than half the Haynesville permits issued in Louisiana in February were on acreage already held by a previous well.

"Many industry pundits have predicted that once term acreage is secured (about three years after the land grab), the rig count in the region will fall off a cliff, and gas production will fall shortly thereafter. So do we think the rig count falls in the back half of 2011?" Adkins asked. "Of course, rigs have already begun moving to the Eagle Ford. Does it drop to zero? Not even close."

"The number of permits submitted by operators to drill wells 'Not for HBP' (meaning acreage already held by a producing well) has actually increased dramatically on a percentage basis over the past six months -- from one-third to about one-half," he noted.

Using the Haynesville play, Adkins again notes data from the Louisiana Department of Natural Resources that shows the number of uncompleted wells increasing even as the rig count in the play falls off.

"We're not simply alluding to the infrastructure-related three- to four- month lag between rig count changes and when production actually hits the market," Adkins said. "Rather, we're focusing on the all-time high level of uncompleted wells waiting to be hooked up to a pipeline," Adkins added, noting that despite a 40-rig drop from rig count highs in June, the number of uncompleted wells in the Haynesville continues to hover between 450 and 500 wells.

"That's a meaningful amount of supply waiting behind pipe."

So meaningful, Adkins said, that producers could shut down their Haynesville operations for the rest of the year and supply would not drop for the year as uncompleted wells were hooked into a pipeline.

Gas traders have underestimated the amount of gas coming from liquids-rich plays such as the Eagle Ford Shale and the Woodford Shale, Adkins said.

"We have found that the relevance of these plays for US gas supply is often underestimated by investors, likely due to the industry's success in marketing the assets as 'oil' and/or 'liquids' plays," Adkins said, which makes sense because it's the crude of the natural gas liquids that makes the Eagle Ford well profitable. "Dry gas is viewed more as a byproduct," he said. "Who do we think we are, Qatar?"

We must, Adkins said, because the volume of dry gas coming from the oily well is still comparable to a pure dry gas well in the Barnett, and it all adds to the supply glut.

Finally, "drillers are just simply too good at getting gas out of the ground," Adkins noted. "How often do you hear operators talk about the increasing number of days to drill a well?" "Never" he said, noting that producers have decreased drilling times by 26% in the Barnett and 35% in the Fayetteville and those same efficiencies are being seen in newer shales such as the Haynesville and Marcellus.

"The Haynesville Shale just recently passed the Barnett Shale as the top gas-producing shale play in the United States, now producing 5.5 Bcf/d after just two years of large-scale production. It took Barnett production nearly a decade to top the 5 Bcf/d mark," Adkins said.

"So, next up on deck, Marcellus Shale?," he asked.

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