Arkansas Shale Drilling Activity Continues Decline

Historically low natural gas prices have pushed the state’s rig count to its lowest level in more than six years and have substantially stalled production and hiring in the Fayetteville Shale, industry experts say.

On Friday, natural gas futures fell to a 10-year low, plunging 10 cents, or 4.7% to 2.17 per 1,000 cubic feet (mcf) in trading on the New York Mercantile Exchange. Those falling prices are causing some to wonder if drilling for natural gas is actually worth it.

In Arkansas, there were only 27 rotary rigs operating as of March 23, well off 38 a year ago, according to Houston-based oil service giant Baker Hughes. Of that total, 25 horizontal rotary rigs are located in the Fayetteville Shale, where production has been steadily declining in tandem with falling wellhead prices for natural gas.

James Williams, publisher of the closely-watched Energy Economist newsletter, said Arkansas’ weak rig count is “exactly what you expect to happen” as gas prices continue to look for a bottom.

“Right now, it really does not really pay to drill a well,” said Williams, who is based at the epicenter of the Arkansas unconventional shale play in London, just 10 miles west of Russellville. “Any company that has leases where there is oil is shifting to oil-rich shale plays. If they only have natural gas leases, then the only option they have is to stop or slow drilling and wait for the price to come back up.”

Overall, the total number of rigs drilling for natural gas in the U.S. climbed by six to 658, the first increase in 12 weeks. Last week, the gas-directed rig count fell to a 10-year low at 652. On the oil drilling side, the number of horizontal rigs rose by six to 1,180, just short of the all-time high of 1,185 hit in late January.

The number of drillings rigs in Arkansas peaked in September 2008 at 59, when the wellhead prices for sellers at Henry Hub topped $8.60 per mcf. Since October 2011 when the state’s rig count hit 34, that number has trended downward — falling this past week to its lowest level since the summer of 2006.

BOOM AND BUST
With natural gas prices now at levels not seen since 2002, the number of working rigs is changing from month-to-month and week-to-week. In fact, two rigs have been pulled offline since March 2. A typical rotary rig site usually includes five to 7 man teams that rotate on 24 hours shifts, according to industry data.

“But that same drilling operation may support a lot more jobs throughout the community than at the actual drilling site,” Williams said.

Jeff Lambert, instructor and coordinator of the two-year Petroleum Technology program at the University of Arkansas Community College at Morrilton, said the current low-price environment is simply part of the cyclical nature of the oil and gas industry.

“Everyone knows that you have boom times and bust times. Of course, there will be repercussions on hiring (in the shale), especially on the upstream side of the business,” Lambert said of drilling activity and other wellhead operations.

In 2006, when gas prices were nearly four times higher, UACCM began offering associate degree programs in petroleum technology to provide oil and gas exploration, production and development jobs in the Arkansas shale. Currently, the number of students enrolling in the Petroleum is slightly down, Lambert said, but so is the number of scholarships.

“Support from the industry has been strong and the industry has given us a good response, despite the fact that prices are down,” he said.

Valerie Wood, an energy consultant and president of Energy Solutions Inc., predicted in February that natural gas prices would fall to a 10-year low this year. She said the declining natural gas rig count and the shift to oil-rich shale plays did not cut production levels as many had predicted.

“Over the past year, the active natural gas drilling rig count in the U.S. has fallen by 20 percent, while the active crude oil drilling rig count has risen by 60 percent,” Wood said in her 2012 natural gas outlook. “This shift in drilling rigs did not cause natural gas production levels to decline as expected, and this is partially because the amount of associated gas being produced was dramatically underestimated.”

THE CHESAPEAKE EXIT
For many Fayetteville Shale watchers, it was Chesapeake’s exit from the Arkansas shale that foreshadowed the current downturn in the Arkansas shale play.

BHP Billiton paid $4.75 billion just over a year ago for Chesapeake’s gas interests in Arkansas, allowing the Oklahoma City-based driller to make a mad dash for oil and liquids-rich shale plays in west Texas, Pennsylvania, Louisiana and parts of Colorado and Wyoming.

According to UBS analyst Glyn Lawcock, now BHP may have to avoid a write down on the $20 billion it paid Chesapeake and Petrohawk Energy for U.S. shale assets by also shifting its drilling and production profile to oil and natural gas liquids.

Today, other U.S. drillers are following Chesapeake’s lead and relocating away from pure natural gas plays like the Fayetteville, the Barnett in Fort Worth and Haynesville in north Louisiana. Liquids rich plays like the Marcellus in Pennsylvania, the Woodford in Oklahoma, the Eagle Ford in south Texas, and the Bakken in North Dakota and Montana have now caught fire.

Yet even with the falling price, Wall Street darling and Fayetteville Shale leader Southwestern Energy has been able to keep the drill-bit engaged in the Arkansas play because of the company’s low cost structure, a strong hedging program and modern drilling techniques that maximize wellhead production.

In December, the company revised its 2012 program downward from $2.3 billion to $2.1 billion, cutting its Fayetteville Shale budget from $1.35 billion to $1.1 billion. Still, Southwestern is expected to grow its total Fayetteville Shale production by 13% in 2012 to 465 to 470 billion cubic feet, which is more than half of Arkansas’ natural gas production in 2011.

At the same time, Southwestern has quietly cut the number of rigs that in operates in the Arkansas shale and move a large portion of that activity to the Marcellus Shale and its new ventures program in south Arkansas and Louisiana.  Those investments are expected to top $800 million for the year.

This article appears courtesy of The City Wire.