Cheap natural gas slows drilling

Low prices for natural gas are rippling through the San Juan Basin, causing some drillers to reconsider their plans.

Prices have been on a sharp decline as shales in Pennsylvania, North Dakota and elsewhere boomed, flooding the markets with natural gas.

Oil and gas industry insiders say natural gas is now so cheap that it’s hardly worth drilling for it.

On Friday, the spot price for natural gas at the Henry Hub fell to $2.36 per million British thermal units, while the futures price on the New York Mercantile Exchange rose slightly to $2.47 per MMBtu.

The spot price has fallen 38 percent compared to a year ago, when on March 2, 2011, it was $3.79. During the San Juan Basin drilling boom in the middle of the last decade, gas routinely traded for $6-$10 per MMBtu.

“It’s brutal, and I think the community needs to brace itself for this most recent slowdown,” said Jason Sandel, executive vice president of Aztec Well Servicing.

“If things remain the same, it’s going to be pretty gloomy here for the next couple of years,” he added.

Perhaps the most promising new natural gas project on the horizon WPX Energy’s plan to drill 53 horizontal wells from eight well pads on Middle Mesa near Navajo Lake has been indefinitely delayed. Production was planned to begin this fall. Low natural gas prices are to blame.

“We love the project and we like the geology,” WPX spokesman Kelly Swan said Friday. “The resource, we believe, is there. But what we ran into was the decline in gas prices.”

WPX Energy, formerly Williams Exploration and Production, is instead focusing its efforts in basins that yield greater amounts of oil. Oil has held its value even as natural gas has declined.

“We’re focusing more toward areas where we get gas and liquids,” Swan said. “When the economics improve, the Middle Mesa project will be on our radar.”

Even if natural gas prices recover, the long lead times for the major drilling project means it’ll be 2013 at the earliest before WPX looks at the Middle Mesa project again, Swan said.

As prices drop, companies are drilling fewer new wells and plugging old ones.

Like many local producers, D.J. Simmons, Inc. is looking strictly for oil, both in the San Juan Basin and other areas of the country. The company does not plan to drill any new natural gas wells this year, said John Byrom, president and CEO.

Prices are just too low.

“It definitely is having a big effect,” Byrom said. “The concern is not just that prices are low now, but it’s looking like at least for the next number of months if not a few years, we’ll be seeing prices that are fairly low. There’s so much gas on the market, and demand is growing so slowly.”

The decline in the San Juan Basin can be seen in New Mexico Oil Conservation Division data for Northwest New Mexico.

Production in 2011 fell below 815 billion cubic feet to the lowest level since 1992. Natural gas production has fallen for five straight years, down 19 percent from the 2006 total of more than 1 trillion cubic feet.

Many in the industry blame a supply glut brought on by record production. The U.S. Energy Information Administration reported Thursday that the amount of gas in storage exceeds the five-year average by 45 percent.

“Natural gas prices have pretty much collapsed in the last few months,” Roy Lyons, general manager of ConocoPhillips San Juan Business Unit, said at a January event.

Lyons pointed out that prices go in cycles. “We are at a low point for one of our products, but that will pass,” he said.

Hopes are high that wells being drilled to explore for oil in the Mancos Shale will prove fruitful. That could lead to a homegrown rush for oil in the San Juan Basin.

However, it’s far from certain that oil can be recovered in sufficient quantities to compensate for the expensive drilling procedures needed to produce it.

Industry officials also are pushing for ways to increase demand for natural gas, such as a new gas-fired power plant or converting vehicle fleets to run on the gas.

But barring an unexpected improvement in prices, San Juan Basin drillers may sit on the sidelines for months to come.

As Byrom said, “We’re going to be in a slump on the gas side for a while.”

Daily Times