Rig Count Down 7 This Week

Gas drilling rig count slips for second straight week

* Horizontal rigs fall from record highs
 (Adds rig graphic)

NEW YORK, Dec 17 (Reuters) - The number of rigs drilling
for natural gas in the United States slid by seven this week to
941, oil services firm Baker Hughes said Friday.

The gas-directed rig count, which has lost ground for two
straight weeks, hit 992 in mid-August, its highest since
February 2009, when 1,018 rigs were drilling for gas.

Horizontal rigs -- the type most often used to extract oil
or gas from shale -- dropped by 12 to 954 after holding at a
record high of 966 in the previous two weeks.

Analysts estimate that two-thirds of horizontal rigs are
drilling for natural gas, and these comprise part of the
overall rig count. The rest are drilling for oil.

(Graphic: link.reuters.com/sup34k)

Front-month U.S. natural gas futures NGc1, which were up
3.2 cents at $4.08 per mmBtu just before the data were released
at 1 p.m. EST (1800 GMT), climbed to an intraday high of $4.11
right after the report before backing off to $4.094 by 1:15
p.m., still up 4.6 cents.

While some firms have said they will shift spending away
from gas due to low prices, gas drilling activity is down only
5 percent from its mid-August high, and recent government data
show production continues to be robust.

Most analysts expect no meaningful slowdown in gas
production until the second half of 2011, at the earliest.

The gas-drilling rig count is still up 276 since bottoming
at 665 on July 17, 2009, its lowest since the 640 posted on May
3, 2002.

While the gas rig count is 41 percent off its record peak
of 1,606 from September 2008, it still stands 168 rigs, or 22
percent, above the same week last year.

Rising output from shale gas has been the primary driver of
increased gas production in the last few years, and most
traders agree it will be difficult to tighten the gas market
unless drilling slows sharply.

Some analysts estimate the gas rig count will have to fall
well below 850 to tighten the supply-demand balance.

Recent estimates by the U.S. Energy Information
Administration put U.S. gas output this year at 22.66 trillion
cubic feet, a record high and the highest since 1973. Next year
EIA sees output dropping only fractionally.

With gas inventories heading into winter still at high
levels and production likely to remain strong into 2011, many
traders expect gas prices to remain cheap relative to oil, at
least until an improving economy boosts industrial demand,
which accounts for nearly 30 percent of U.S. gas consumption