Monday, December 22, 2008

Haynesville Shale Crown Jewel of Natural Gas
BATON ROUGE — A huge drop in the prices of oil and natural gas, consumers driving less and a tight lending market have the oil and gas industry in a bind at the end of a roller coaster year.

After riding high earlier in the year with oil selling for as much as $145 a barrel and natural gas at $13.31 per MMBtu, industry officials have seen oil prices plunge 73 percent and natural gas 58 percent.

"Forty dollar oil is not good," said Larry Wall, spokesman for the Louisiana Mid-Continent Oil and Gas Association. "If you're a consumer buying gasoline, it's good," but for royalty owners who receive monthly checks for production on their property and for companies drilling the wells, "it's very bad.

"It needs to be $60 to $75 a barrel to encourage new projects," he said.

The latest crash, Wall said, was in 1997-98 when oil bottomed out at about $10 a barrel. He said that won't happen again, but the price could get a little lower than it is.

The market price Friday dropped below $40, and some analysts predicted a drop to $20 during 2009.

However, Wall predicts "it will bounce back in a short time, possibly in a couple of months. It hit $50 for a short time the other day."

The Oil and Petroleum Exporting Countries keep trying to drive up the price by cutting back supplies. So far, it's not working, said Wall and Don Briggs, president of the Louisiana Oil and Gas Association. OPEC announced a 2.2 million barrel per day cutback, but prices fell the next day.

The main reason OPEC has not been successful in driving up the price, Briggs said, is "they all cheat on each other." Although they agree to cut production, they don't. "None of them trust each other."

Consumption of gasoline is a major factor in the price of oil, Briggs said. When demand was high, supply dwindled.

"When oil hit $127 (a barrel), people pulled back and consumed less oil," he said. About $30 of that amount was inflated by market speculation of higher demand, and "prices contracted and started falling because demand went down. People are doing less traveling and they're worried about their jobs. Overnight, our tanks were overflowing. We have a 2-to-2½ million barrel surplus."

"The drop in prices is one thing, but what's really kicking us between the eyes is there's no money" to borrow for exploration, Briggs said. "Credit is drying up. The industry is slashing drilling budgets drastically."

Currently, 1,790 drilling rigs are working in the United States — 1,379 drilling for natural gas and 411 for oil, according to Baker Hughes, a worldwide oilfield service company.

Briggs said he has heard predictions that as many as 1,000 of those rigs could be shut down. "I really don't believe that. But we could lose 600 rigs" drilling new wells.

Baker Hughes reported that Louisiana had 172 rigs working Dec. 19. Of those, 87 were in north Louisiana, nine were in south Louisiana inland waters, 23 were on land in south Louisiana and 53 were offshore. Two weeks earlier, 185 were reported working.

Wall said that doesn't necessarily mean that the rigs won't come back.

"At this time of year, rigs are sometimes moved for tax purposes," he said. Parishes have different tax policies, so a rig might be moved across parish lines until tax assessments are completed at the end of the year.

Briggs said some companies are pulling back their exploration of natural gas in shale deposits in Texas, Pennsylvania, Wyoming and Colorado, but "companies are keeping their rigs in the Haynesville Shale" in northwest Louisiana. "North Louisiana will flourish and hardly feel the crunch because the Haynesville economics are so good. They're high-producing gas wells."

Of the 3 million acres in the Haynesville Shale, 2.8 million have leases, he said.

Briggs predicts that the rest of the state won't be so lucky and "in south Louisiana and inland waters, budgets will be cut. There could be some layoffs," but scientists employed by oil and gas producers will be safe. "Most companies will tighten their belts and work through this."

Steady production is depleting the world's supply of oil at a rate of about 7 percent a year, he said. Worldwide, about 85 million barrels of oil are produced yearly, and production drops about 6 million barrels per year. To maintain the same production, new sources have to be found.

"U.S. production is 5 million barrels a day," Briggs said. "So, just to stay afloat, companies have to find a whole new United States production of oil every year. As a nation, energy security is not going to come from oil."

Unlike oil, natural gas supplies are plentiful, Briggs said.

"Natural gas is the green fuel and there's plenty of it," he said, and the Haynesville Shale is "the crown jewel."

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