How strange to think it was not so long ago that North American gas supplies were tight and prices, while volatile, were hovering around $13/Mcf.
How strange to think it was not so long ago that North American gas supplies were tight and prices, while volatile, were hovering around $13/Mcf.
Then along came the now-ubiquitous shale gas plays with their reported copious reserves and high volume IPs, accompanied by the worst recession since the 1930s and …
Bang.
The ensuing decreased demand and increased production sent an all-time record 3,833 Bcf into storage by mid-November 2009, according to Steve Trammel, senior product manager at IHS in Denver. He noted average U.S. spot gas price throughout 2009 was $3.96/Mcf – and says to expect soft gas market conditions through most of 2010.
It’s a particularly tough scene in the Rockies, where unconventional gas plays face stiff competition from the high volume, lower cost shale gas wells in other parts of the country.
“The Marcellus and Haynesville and some others are such high volume gas plays and producing so much gas,” Trammel noted. “The Rockies wells producing maybe 3 MMcf a day have a hard time competing with IPs of 13 to 15 MMcf.”
It doesn’t help that Rockies gas is the lowest priced gas in the United States. In fact the producers will be challenged to reduce costs to prevail with sub-$5 gas and continuing negative basis differentials during the coming year, according to Trammel.
Energy policy access restrictions and new rules contribute their share of negative impact on cost.
The Rockies plays, for the most part, produce drier gas – in fact, the region yields 36 percent of total U.S. dry gas production, compared to 29 percent five years ago, according to information from FERC.
Dry gas is not a good thing today.
“When you have an oil-gas price differential of 15 to 1, or 20 to 1, people are leaving gas plays and going strictly to liquids and also to shale gas plays with NGLs associated with them,” Trammel said. “The NGLs makes the economics wonderful.
“Lots of shale plays, especially the Marcellus and Eagle Ford, have liquids associated with them,” he noted.
“A good example of someone moving off to chase oil and liquids is Pioneer (Natural Resources),” Trammel said. “They had a huge operation in the Raton Basin for coalbed and were going to drill the Pierre shale – now they’ve pretty much shut down a lot of that and gone to the West Texas Permian drilling for Spraberry oil.
“They just moved out of the Rockies for the time being,” he said.
In the quest for cost improvement, Rockies players are applying technology such as pad drilling. This yields a smaller environmental footprint and enables the operator to move a fit-for-purpose rig onto the pad and drill a number of wells from it and then bring in the completion rig to complete all of them.
As for the thorny issue of demand, the best potential for gas demand growth for the Rockies lies in the power sector, according to Trammel. But the West is a coal-rich region, and much of the power hasn’t been switched over to gas yet, so there’s work to be done there.
Positive Signs
But don’t despair – all is not gloom ‘n’ doom.
Trammel noted there are a number of plays that are still competitive, including:
- Pinedale-Jonah in southwest Wyoming, where drilling and completion costs are under control. A number of wells have been drilled there over many years – and the higher volume wells kick out as much as 5 MMcf/d.
- ExxonMobil operations in the Piceance remain competitive, aided by considerable pad drilling.
- The big Wattenburg gas field near Denver in the DJ Basin, with its NGLs, continues to rock ‘n’ roll successfully.
- Coalbed is important in the Rockies and marginally competitive. By and large, these are lower volume wells with higher cost because of de-watering and disposal of the water before the wells can come on.
“The great irony is in the innovative work the Rockies producers did with drilling and how to make, especially, tight gas sands pay,” Trammel said. “They started using slick water and staged frac jobs, and that boosted well volumes and such.
“This created a monster breakthrough elsewhere because people started applying tight gas sand work to wells in the Barnett, the Marcellus, Haynesville,” Trammel said. “They were doing horizontal, which was key, and applying these big, slick water-staged frac jobs – that’s why they’re getting such huge volumes of gas out of shale plays elsewhere.
“Ironically, the Rockies developed an innovation that kind of came back to hurt,” Trammel added.
The Marcellus alone poses enormous competition.
“The Marcellus by 2020 could supply all of the northeast gas demand and even send some back to the Midwest’s mid-continent area,” noted AAPG member Pete Stark, vice president for industry relations at IHS-CERA, in the IHS-CERA study dubbed “Cream of the Crop: Performance Analytics for North American Gas Resource Plays.”
“The Rockies players must be creative with their markets,” Trammel emphasized. “They must cut costs to the bone to compete with the higher volume plays that have NGLs associated with them.”
He noted that Horace Greeley’s advice from the mid-19th century to ‘go west, young man’ comes into play here.
“Rockies producers must look to the West Coast to see what kind of market they can do there,” Trammel said. “There’s existing pipelines to the West Coast, and also the planned Ruby pipeline will access significant Rockies supplies and make them available to consuming markets in California, Nevada and the Pacific Northwest.
“One of their big competitors for the West Coast gas market has been the Permian Basin, and now people in the Permian are focused on liquids, NGL,” he said. “This helps the Rockies a little with competition for the West Coast gas market.”
There’s been a huge decline in the rig count in the Rockies since August 2009, according to Trammel – in fact, at one point it declined by more than 50 percent.
“Even so, production is still sustaining at close to 9.3 Bcf a day,” he said. “That speaks to the amount of gas they’ve been able to find there.
“Reported increases in IP test volumes in the Piceance Basin are evidence that operators can boost the productivity side of the cost/Mcf equation,” Trammel added. “Lower rig, supply and service fees should help on the cost side.”