Arkansas drilling permits see uptick in July, natural gas prices move closer to $3

Arkansas’ rig count in 2016 remained at zero through the end of July, but the number of natural gas producers seeking drilling permits spiked over the past two weeks as signs of activity began to emerge in the mostly quiet Fayetteville Shale.

At the same time, natural gas prices continued to move closer to the $3 level as the U.S. Energy Information Administration (EIA) reported Thursday (Aug. 4) that U.S. stockpiles had declined by 6 billion cubic feet for the week ending July 29, despite analyst expectations for inventories to continue to grow.

According to weekly drilling and completions reports compiled each week by the Arkansas Oil and Gas Commission (AOGC), the Arkansas subsidiary of Southwestern Energy Inc. (SEECO) has received 14 renewal drillings permits in White, Conway, Van Buren and Faulkner in the month of July.

By comparison, state regulators only approved one drilling permit each in the Fayetteville Shale in the months of June and April, nine in May, and five in March. All of the SEECO permits approved by state oil and gas regulators are for drilling activity in the Fayetteville Shale’s prolific B-43 field in north-central Arkansas, which has produced more than $260 million in total marketed natural gas sales in 2016, according to AOGC data.

Although the increase in the number of permits does not always lead to well completion or production, they are leading indicators to identify new drilling activity and operators, industry analysts say. In most cases, it takes most oil and gas operators at least a few months to ramp up crews and rig equipment in order to begin drilling on a new well. Some energy analysts also say the number of completions – wells that have been drilled and ready to produce natural gas and oil – are a better indicator of how a development area is doing.

American Petroleum Institute data shows estimated exploratory natural gas well completions in the second quarter of 2016 decreased 84% compared to year-ago levels. So far this year, development well-footage has decreased 53% and exploratory well footage has decreased by 64%.

DRILLERS SEE UPSIDE IN LOW-COST ENVIRONMENT
According to a new study by HIS Market, there is significant upside potential for U.S. oil and gas operators to apply lower-cost unconventional drilling and completion technologies to boost production from tight conventional reservoirs.

Although the Fayetteville Shale play was not part of the study, IHS Markit said leveraging the technologies is attractive to operators because the overall break-even costs to develop the projects are much lower and delivery infrastructure is already in place.

“These tight conventional resources are in reservoirs with older vertical wells that can be re-entered by horizontal drilling,” said Steve Trammel, director of North America well and production content at IHS Markit Energy. “The rock properties do not require the size and cost of a hydraulic frack job needed for an unconventional zone, and therefore these are much more economic for operators in the current low oil price environment.”

In the July drilling data from the AOGC, the increased number of drilling permits for SEECO took place about the same time Southwestern Energy announced a renewed capital program to reboot hiring and bring back employees laid off earlier this year – including a boost of activity in Arkansas’ Fayetteville Shale Play. In the company’s second quarter earnings report, Southwestern President and CEO Bill Way said the Texas natural gas producer had recently strengthened its balance sheet and liquidity profile through a combination of extended bank agreements, successfully issuing equity, launching and concluding tender offers for debt and negotiating long-dated inventory monetization.

SOUTHWESTERN READY TO RE-ENGAGE FAYETTEVILLE SHALE
Southwestern said the improved financial position will also allow the Texas driller to activate a plan to accelerate investment of $500 million into “high-return” projects within each of the company’s core assets, including the Fayetteville Shale. Nearly $375 million of that capital is expected to be invested by the end of 2016, officials said.

Southwestern spokeswoman Christina Fowler would not provide additional details on the number of employees the company plans to rehire in the Fayetteville Shale, but the second quarter earnings report shows the company only spent $13 million thus far in 2016, just enough to keep the lights on.

However, the company’s new guidance shows Southwestern plans to reinitiate a companywide drilling and completion program that will bring five new drilling rigs back into operation for the rest of 2016, including one new rig and a healthy $73 million in capital spend in the Arkansas shale play.

In late January, Southwestern laid off around 1,100 workers companywide with 600 of those jobs to cut in Arkansas. The Texas driller’s Fayetteville Shale operations in Arkansas had more than 1,500 workers nearly two year ago when production peaked, and well before all the company’s drilling rigs were mothballed at the end of 2015.

OIL PRODUCTION GETTING MOST RESOURCES
Despite the promise of more drilling activity in Arkansas and other parts of the U.S., Baker Hughes weekly rig data and IHS Market’s study show that most of the capital investment is going toward areas that produce crude oil.

Last week, Baker Hughes weekly rig count rose by one to 363. The U.S. oil rig count rose for the fifth straight week to 374, up three for the week. However, the natural gas rig count fell by two to only 86 active drilling pads.

At the close of business Thursday on the New York Mercantile Exchange, natural gas futures for September delivery rose to as high as $2.853 per million British thermal units (MMBtu) following the EIA report before settling at $2.834 per MMBtu, down 0.18%.

Since falling to lows of $1.49 per MMBtu in early March, natural gas prices have nearly doubled in the summer and rose to $2.97 per MMBtu on Monday. Many drillers, including Southwestern and BHP Billiton, have indicated they would consider rehiring drilling crews if natural gas prices rose above the so-called $3 breakeven level.