08/16/2011 Star Telegram

Rise in drilling in DFW's Barnett Shale unlikely in 2012 as natural gas prices remain low

By Jack Z. Smith
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The price of natural gas is expected to remain depressed in 2012, keeping a damper on drilling in North Texas' Barnett Shale, where the rig count has fallen to less than one-third its peak in 2008.

On the plus side, sustained weakness in natural gas prices is good news for Texas electricity and gas consumers, who have benefited from lower residential utility bills in the past three years. Natural gas fuels much of Texas' electricity.

Dan Morrison, managing director and senior energy analyst with Global Hunter Securities in Fort Worth, said continued weak gas prices in 2012 will make it likely that drilling activity will "tail off in the Barnett. ... It's going to be hard for them to keep the rigs running."

Natural gas closed at $2.99 per million British thermal units in futures trading Friday on the New York Mercantile Exchange, marking the first time in more than two years that the price had fallen below $3. Global Hunter has reduced its projected average price for 2012 to $4 per million Btu -- a dollar below an earlier projection. But with the recent declines in natural gas prices, Global Hunter and other investment firms are likely to make additional downward adjustments in their forecasts.
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t's uncertain how much further gas prices might decline.

"When you get to this kind of malaise, anything is possible," Morrison said, noting that a gas glut remains despite a downturn in the number of U.S. rigs drilling for gas. Producers are shifting to more "liquid" plays offering the prospect of recovering more attractively priced oil and natural gas liquids.

The U.S. Energy Department, in a Dec. 6 report, lowered its projected 2012 average natural gas price to $3.70, a 43-cent drop from its previous forecast.

Escalating production in U.S. shale-gas fields is consistently cited by industry analysts as a key reason for the current excess in supply that has deflated prices. The Energy Department has projected that U.S. marketed gas production will average 65.9 billion cubic feet of gas per day in 2011, a 6.6 percent increase from 2010.

Mark Caffey, CEO of Fort Worth-based Caffey Group, which is involved in Barnett Shale leasing, is less pessimistic than some about 2012 natural gas prices but far short of bullish.

He foresees prices experiencing a modest recovery in 2012, rising perhaps 10 to 20 percent for the year. Considerably larger price gains are likely in 2013, he said.

Caffey said two major acquisitions this year in the Barnett Shale -- Legend Natural Gas' $900 million purchase of Range Resources properties and EnerVest's $975 million buy of Encana Oil & Gas holdings -- offer an encouraging sign for higher prices and a potential uptick in drilling.

"Those were $900 million deals," Caffey said. "Rest assured, they [Legend and EnerVest] both expect natural gas prices to increase, or they wouldn't have made those two expensive acquisitions."

In October, the number of rigs drilling in the Barnett Shale plummeted into the low 50s, the lowest level since mid-2004 and barely more than one-fourth the peak of 203 active rigs Sept. 5, 2008, a year when natural gas prices soared above $13.

Since then, the number of rigs drilling in the Barnett has increased a bit and stood at 64 on Friday, according to RigData.

Low natural gas prices hurt not only energy producers and oil field service contractors, who get less business, but also royalty owners who see their payments reduced and mineral owners who are seeking to sign a gas lease, Caffey said.

In 2008, when natural gas prices were roughly double or triple current levels, energy companies were in some instances offering lease bonuses of $25,000 to $30,000 an acre and royalties of 25 to 27.5 percent.

Now, a fairly standard offer might be only $2,500 to $3,000 an acre, with 20 to 25 percent royalties, although some bonuses could still reach $5,000 to $7,000 an acre, said Caffey, who is a partner with Newark Energy in oil and gas drilling and production in North Texas.

If natural gas prices stay low, Texas energy consumers can expect a continuation of modest electric rates and costs for gas heating, said John Fainter, CEO of the Association of Electric Companies of Texas.

"For the consumer, the tremendous supplies of natural gas that have been discovered have ... been reflected in the price of electricity," he said.

Texans in competitive, deregulated electricity markets can get lower fixed rates than a decade ago when regulation was still in place, Fainter said.

One-year fixed rates as low as 8.2 cents per kilowatt-hour were available as of Friday, according to listings at www.powertochoose.org, overseen by the Texas Public Utility Commission.

The lower rates have meant savings of hundreds or even thousands of dollars annually for many households.
Many consumers paid 13 to 18 cents per kilowatt-hour or more in earlier years when natural gas prices were much higher.

Fainter said, however, that even if natural gas prices remain low, electric rates could rise because of the need to build more generating units to meet growing demand and the costs of complying with tougher federal regulations designed to curb air pollution from power plants.

Jack Z. Smith, 817-390-7724