The announcement was not unexpected, and it followed a trend that has been under way for several months: oil and gas companies have been transferring drilling rigs to oil fields from natural gas fields. But given that Chesapeake has been the industry’s most public champion of natural gas, its announcement of an 8 percent cut in daily production led to a substantial rally in gas prices that had fallen last week to their lowest level in a decade.
Natural gas prices have been steadily falling over the last two years because of a glut stemming from mushrooming production in shale fields like the Haynesville in Louisiana, the Barnett in Texas and the Marcellus in Pennsylvania. Warm weather so far this winter has also cut normal seasonal demand significantly.
Aubrey K. McClendon, Chesapeake’s chief executive, said in a statement, “We have committed to cut our dry gas drilling to bare minimum levels.”
The company, based in Oklahoma City, said it would reallocate its investments from natural gas drilling to fields that are rich in oil and other hydrocarbon liquids like ethane, butane and propane, which are used as feedstocks for refining gasoline, diesel, heating and petrochemicals. Those fields are mainly in Ohio, Texas, Oklahoma and Wyoming.
Oil prices have remained strong the last two years because of instability in the Middle East and North Africa and growing demand in China and other developing countries. Since natural gas is not easily exported, prices in the United States are not tied to natural gas prices in Europe and Asia, which are still high.
Chesapeake, which has been responsible for almost a tenth of national gas output, said it would cut spending on drilling gas wells to $900 million in 2012 from $3.1 billion last year. The company said it would idle half of its drilling rigs in the next several months in fields that produce gas but no oil or hydrocarbon liquids.
The announcement showed that the oil industry does not know what to do with all the gas it is able to produce in shale fields, which were considered almost useless until a decade ago when new production techniques, including horizontal drilling and hydraulic fracturing, were first employed in a major way.
“This is a sign that the low price of gas has changed expectations for at least the next three to five years,” said Michael C. Lynch, president of Strategic Energy Economic Research, a consultancy. “If they thought the price would recover in a year or so, they would keep drilling.”
The Energy Department released a report on Monday predicting that shale gas production would increase to 13.6 trillion cubic feet in 2035, or 49 percent of total domestic natural production, from 5 trillion cubic feet in 2010, or 23 percent.
Gas futures contracts on the New York Mercantile Exchange rallied by almost 8 percent on Monday. Chesapeake shares rose by $1.32 to close at $22.28.
Halliburton, a leading service provider to oil and gas producers, warned last week that the slump in natural gas drilling could cause disruptions in its first-quarter operations and earnings. But the company said it expected that the shift to oil drilling from gas would not hurt its earnings over the year.
“We are very optimistic about 2012 and fully expect that North American revenue and operating income will increase over 2011,” said Dave J. Lesar, Halliburton’s chief executive, in a conference call.
Article source: http://feeds.nytimes.com/click.phdo?i=10da312dcde9aea402d4f70be194f922
Speak Your Mind
You must be logged in to post a comment.