Friday, January 27, 2012

Rigging Down on Low Gas Prices

This week shale gas champion Chesapeake Energy announced that they are backing off dry gas drilling and production. Quote:

 Chesapeake Plans to Reduce its Operated Dry Gas Drilling Rig Count to 24 Rigs, a Decline of Approximately 50 Dry Gas Rigs from its 2011 Average Operated Dry Gas Rig Count. 
Chesapeake Plans to Curtail its Gross Operated Gas Production by up to 1.0 Bcf per Day and Plans to Defer New Dry Gas Well Completions and Pipeline Connections Wherever Possible 
 This isn't anything new. Chesapeake has "deferred" production before when the price dips below $4/MMBTU.  The graphic below shows the gas price over time with a sales volume bars on the left.  You'll note the actual volume of transactions is in the $4.00 to $4.40 / MMBTU range.  There's virtually no incentive to drill for dry gas at today's insanely low prices.

I view the Chesapeake action as further validation the $4/MMBTU is the long term support level for lower 48 natural gas. Overall gas rig rates are down 14% from a year ago (791 now vs. 906 last year). We'll soon learn if $4/MMBTU less transportation cost of $1.5/MMBTU can support an LNG plant in Alaska.

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