Dropping Natural Gas Prices Curtailing Drilling Activity, Lowering Consumer Bills

While Houston-based Southwestern Energy has the luxury of continuing to drill, even with prices well below their own internal forecast, other drillers are keeping a watchful eye on the current price.

Earlier this month, the U.S. Energy Information Administration said it expects 2012 Henry Hub natural gas spot prices to average $3.35 per MMBtu, a decline of about $0.65 per MMBtu from the 2011 average spot price.

The U.S. Department of Energy statistical arm said it expects that Henry Hub spot prices will average $4.07 per MMBtu in 2013, a target some say is too optimistic.

At the end of January, Morgan Stanley cut its 2012 forecast to an average of $2.70 per MMBtu, down 30 percent from $3.85 per MMBtu in 2011. Goldman Sachs, which famously said natural prices had bottomed out at $4 last summer, has since cut its forecast twice to a 2012 target of $3.10 MMBtu. Still, the Wall Street firm has not backed off its 2013 target price of $4.25.

CHESAPEAKE CUTS
Those forecasts have caused other several top producers, including current and former Fayetteville Shale operators, to reassess their 2012 capital budgets and drilling plans.

On Jan. 23, Chesapeake Energy Corp. was the first major U.S.-based producer to announce a major reduction in drilling, cutting in half the number of dry gas rigs in the U.S. from 47 to 24. The former Fayetteville Shale king, which exited the Arkansas natural gas play in 2011, has now shifted much of its production to liquid-rich plays in west Texas, Pennsylvania, Louisiana and parts of Colorado and Wyoming.

“An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise,” said Chesapeake CEO Aubrey McClendon. “Having led the industry in natural gas production growth over the past 10 and five years, we recognize the need to demonstrate leadership and take action now in order to protect value for our shareholders.”

BHP Billiton, the Australian company that purchased Chesapeake’s stake in the Fayetteville Shale last April for $4.75 billion in cash, also announced plans to reduce the number of operating rigs in Arkansas.

BHP CHANGE
Last fall, BHP’s Houston-based petroleum division chief executive, Mike Yeager, predicted that the Australian industrial conglomerate would pick up drilling activity in Arkansas in 2012 and 2013.

At the time, Yeager said BHP planned to ramp up drilling in the Fayetteville Shale to 20 rigs starting in January, up from nine operating rigs in 2011. The new rigs were part of $1 billion in investment BHP had planned for the year.

But that sentiment has now changed, along with the market price of natural gas. In a presentation to Wall Street analysts on Feb. 7, BHP Billiton Ltd. CEO Marius Kloppers said the Australian commodities giant was now “selectively developing the most productive areas in our dry gas fields.”

Kloppers said BHP was shifting its focus to liquids-rich plays like the Eagle Ford shale in south Texas. Last year, the Australian firm purchased over one million net acres in the huge Texas basin from Petrohawk Corp. for $15 billion, one of the largest oil and gas deals in 2011.

“And it’s clear that oil in the U.S. and shale oil and the development around the technology there has moved on, even just in the last six months,” Kloppers told analysts in a question and answer session. “That was one of the explicit reasons we bought Petrohawk because it had — what we thought — was the finest acreage available in the Black Hawk and Red Hawk fields.”

Since that conference call, BHP has since announced it plans to cut production in the Arkansas shale by three or four rigs. Nationwide, the natural gas rig count has declined for the fifth straight week, down 25 rigs to 720, according to Baker Hughes.

RIG COUNTS
The current natural gas rig count is well behind the all-time high of 1,606 reached in the late summer of 2008, when spot prices above $10 per MMBtu were common. A year ago, there were 906 active natural gas rigs operating in the U.S.

Despite the slowdown in Arkansas’ gas play and other U.S. dry-shale developments, producers are still investing billions in U.S. domestic oil and natural gas production.

Altogether, the three biggest producers – Southwestern, BHP and ExxonMobil’s XTO Energy – are still expected to spend at least $3 billion on production projects in the Arkansas shale play. XTO did not respond to media inquiries for this article.

Still, even those plans could change. Analyst and energy experts agreed that the falling spot price for natural gas has cast a pale over the industry. Even the Obama Administration, whose fights with the energy sector are well known, has recently spotlighted the industry’s cash-laden investments in domestic oil and gas production as one of the bright spots in the nation’s economy.

Fadel Gheit, managing director and senior energy analyst at New York-based Oppenheimer & Co., has forecasted that spot prices for natural gas will average between $3 and $3.50 per Mcf through 2012, and between $3.50-$4 per Mcf in 2013.

“Anything above $4 will increase production and depressed prices,” the New York-based analyst said.

LOWER CONSUMER RATES
While drillers debate whether to drill or cut back, consumers are seeing lower gas bills because of the depressed wellhead prices. Some electric and gas companies that purchase natural gas for power generation are passing those “burner tip” savings to their business and residential customers.

To date, most Arkansas consumers are already seeing lower gas bills, mainly due to the mild winter weather and lower wholesale prices. Several electric and gas companies are already asking regulators for permission to lower consumers’ gas bills because of falling wholesale prices.

Just last week, CenterPoint cut winter bills nearly 20% for their customers in Mississippi.

“The price we pay to purchase natural gas has continued to drop in the last several months,” said Bruce Coogler, vice president of Gas Supply for CenterPoint Energy. “We are happy to be passing along savings to our customers since gas usage is typically higher at this time of year due to heating needs.”

On average, the adjustment will lower a Mississippi residential winter gas bill using 100 Ccf (hundred cubic feet) of natural gas from $79.36 in January to $64.29 this month.

CenterPoint spokesman Alicia Dixon says the Houston-based gas company plans to pass on lower natural gas prices to Arkansas customers in April.

“In Arkansas, we adjust twice a year – in April and November,” Dixon said. “However, at this time, we don’t know exactly what those savings will be.”

CenterPoint serves about 436,000 total customers in Arkansas, including about 388,000 residential customers.

Read more about the market fundamentals and what’s driving future investment for the natural gas industry in Arkansas and the U.S. at this link.

This report was provided by Wesley Brown, courtesy of our content partner, The City Wire. Brown is a former oil and gas reporter for the Tulsa World, and worked as U.S. energy correspondent for New York-based Bridge News, which was purchased by Reuters. He also spent several years covering the energy sector in Arkansas.