Shale drilling drives growth in U.S. natural gas reserves

U.S. natural gas proved reserves jumped to their highest level in nearly 40 years in 2009, primarily driven by unconventional natural gas developments like Arkansas’ Fayetteville Shale play, the EIA announced Dec. 1.

U.S reserves, estimated as "wet" gas which includes natural gas plant liquids, increased by 11% in 2009 to 284 trillion cubic feet (Tcf), according to the U.S. Energy Information Administration’s summary on U.S. crude oil and natural gas reserves.

"Shale gas development drove an 11 percent increase in U.S. natural gas proved reserves last year, to their highest level since 1971, demonstrating the growing importance of shale gas in meeting both current and projected energy needs," said Richard Newell, EIA’s Administrator. "Louisiana, Arkansas, Texas, Oklahoma, and Pennsylvania were the leading states in adding new proved reserves of shale gas during 2009."

According to the EIA annual report, Louisiana led the nation in additions of natural gas proved reserves with a net increase of 9.2 Tcf (77%) owing primarily to development of the Haynesville Shale. Both Arkansas (Fayetteville Shale) and Pennsylvania (Marcellus Shale) nearly doubled their reserves with net increases of 5.2 Tcf and 3.4 Tcf respectively.

In June, Talk Business and The City Wire first reported that Arkansas is now the 7th largest producer of marketed natural gas, trailing only Texas, Wyoming, Oklahoma, New Mexico, Colorado and Louisiana.

Fueled by billions of dollars of new investment in the Fayetteville Shale, Arkansas leapfrogged states such as California, Utah and Alaska to jump into the nation’s top 10 in 2008, and has remained strongly in the position in 2009 and throughout 2010. That report was completed from requested information from the Arkansas Oil and Gas Commission and the EIA, which is housed in the U.S. Department of Energy.

Despite those reports, "persistently low" natural gas prices are causing some oil and gas drillers to cut future production in the Fayetteville Shale and other similar unconventional plays. For example, Chesapeake Energy is reducing its projected 2011 drilling and completion capital spending on natural gas plays by nearly $400 million and redirecting that investment into its "liquids-rich" strategy — meaning crude oil and natural gas liquids.

However, Fayetteville Shale leader Southwestern Energy said that it plans to continue its aggressive production growth in the Arkansas play, albeit with fewer drilling rigs.

"In response to the low gas prices we see today, we have dropped our horizontal rig count to 13 rigs in the Fayetteville Shale," said Steve Mueller, Southwestern’s President and CEO. "With our low cost structure and large inventory of wells in the Fayetteville Shale, we are well-positioned to weather the current low gas price environment with profitable growth in production and reserves."

In Southwestern’s exploration and production segment, natural gas and oil production totaled 105 billion cubic feet equivalent (Bcfe) in the third quarter of 2010, up 44% from 73.2 Bcfe in the third quarter of 2009. That production included 92.3 Bcf from the company’s Fayetteville Shale play, up from 58.8 Bcf in the third quarter of 2009.

Southwestern’s average realized gas price in the third quarter, which includes the company’s hedging contracts, was $4.67 per million cubic feet (Mcf), compared to $5.06 per Mcf in the third quarter of 2009.

The natural gas production spike in 2009 occurred despite a 32% decline in the natural gas wellhead prices from the previous year. More recently, the EIA again lowered its 2011 expectation for the Henry Hub spot gas prices in 2011 to an average of $4.76 per MMBtu, down 22 cents from earlier predictions.

Meanwhile, unlike the situation for natural gas, where proved reserves grew robustly despite lower wellhead prices, the rise in proved reserves of crude oil was supported by a 37% increase in the crude oil prices used to estimate reserves, the EIA report said. 

On Wednesday, natural gas for January delivery traded at $4.223 a million British thermal units on the New York Mercantile Exchange. January crude prices at NYMEX rose $1.49 to $85.60 a barrel in trading on Wednesday.

U.S. crude oil stockpiles rose 1.07 million barrels during the Thanksgiving week, the EIA said. Inventories were expected to be down 900,000 barrels.