Recent reports inform about natural gas sector

With natural gas exploration, production and commodity management important to the the Fort Smith regional economy, a July 31 report from the American Gas Association and a recent report from Oklahoma City-based Chesapeake Energy offer insight into the future of the sector.

The mining-logging-construction sector in the Fort Smith metro area employed an estimated 8,900 in June, up from the 8,600 in April but down from the 9,200 peak in August. (The U.S. Bureau of Labor Statistics does not provide a breakdown between the three employment fields.) In Arkansas, there were an estimated 11,700 mining and logging jobs in June, the highest total since data collection on the sector began.

Although natural gas prices are at lows (between $3.40 and $3.60 mmbtu; compared to above $9 per mmbtu in July 2008) not seen in recent years, some companies are still active in Arkansas’ Fayetteville Shale Play. The play, a new source for natural gas in north and central Arkansas first tapped in 2004, is still expected to generate thousands of jobs and billions in economic impact for the state.

Chesapeake recently noted that the Fayetteville Shale is the second most productive shale play in the U.S. and one of the nation’s 10-largest natural gas fields of any type. Chesapeake is the second-largest leaseholder in the play, with 440,000 net acres. The company said it increased by 15% its daily net production of natural gas during the second quarter over the first quarter, and increased production 60% over the same quarter of 2008. Chesapeake reports daily production of about 240 mmcfe (million cubic feet equivalent) and expects to reach 300 mmcfe by year end.

“To further develop its 440,000 net acres of Core Fayetteville leasehold, Chesapeake anticipates operating an average of approximately 18 rigs in the second half of 2009 and 16 rigs in 2010 to drill approximately 80 and 140 net wells, respectively,” the company noted in its second quarter operating statement.

BP America has stepped in financially to support Chesapeake when natural gas prices began to plummet. BP paid $337 million of the company’s drilling costs in the first half of 2009, and is expected to pay all the costs — about $300 million — in the second half of the year.

FITCH REPORT
Fitch Ratings expects the low natural gas prices to force drilling and services companies to continue to cut capital expenditures, the service noted in its “Oil & Gas Insights” report released July 30.

Specifically, Fitch says the drilling & services sector is “suffering from an imbalance between supply and demand” with weakened commodity prices having reduced demand just as supply of newbuild rigs continues to hit the market.

“Current supply and demand fundamentals for both crude oil and natural gas continue to point toward weakening prices, although natural gas prices remain under more intense pricing pressures as supply from U.S. onshore production and expectations of increased LNG imports continue to weigh on the market,” Fitch noted in the report.

AGA REPORT
The American Gas Association reports monthly on the state of the industry. Highlights from its July 31 report included:

• “Reported Prices — it seems increasingly likely that futures contracts at Henry Hub are
reflecting the consistent strength of natural gas supply but that market players also recognize that the growth in year-over-year and month-over-month domestic production has halted. In anticipation of slowing production and winter heating season demand, natural gas futures are in the $5.15-5.50 per MMBtu range for December 2009 through March 2010 compared to current cash prices of about $3.40 per MMBtu. If no supply disruptions present themselves this hurricane season and with storage filling rapidly, it will be interesting to see if price strength in the cash and forward market continues.”  

• “Rig Counts – According to Baker Hughes, the rotary rig count in the United States stood at 943 on July 24, a 23 rig increase from the prior week. Natural gas rig activity also increased in the week ending July 24, moving up 10 rigs to 675. This is the third increase in natural gas rig counts in the past six weeks, perhaps a signal that the free fall in rig counts has bottomed out.  If it has, the bottom may have come in the week ending July 17, when the 665 operating gas rigs was the lowest level since May 2000.”

• “Natural Gas Market Summary – natural gas to power generation, which tends to average about 15 Bcf per day from January to mid-May, has averaged 25 Bcf per day in July.  July averages for the power generation market in 2007 and 2008 were also in the 25-26 Bcf per day range. However, late July to early August has seen peaks in natural gas consumption for power of as much as 38 Bcf per day going back to 2007. Those peaks have not been seriously challenged so far in 2009. Along with reduced industrial natural gas consumption and a still strong supply position, daily markets have still balanced at a Henry Hub pricing point around $3.50 per MMBtu. However, if predictions of a cold winter hold true, and if rumblings of economic recovery translate into to sustained growth in the near term, how the demand side of the gas equation interacts with what remains a robust supply picture may become a very interesting question in the coming months.”