Long-term natural gas prices should stabilize around $7 per million Btu, says Carin Dehne Kiley, an E&P analyst with Calyon Securities (USA) Inc.

2005 finding and development costs, operating costs, production taxes and other expenses were the highest in the U.S. Rockies, Canada, and in shale-gas plays throughout the country, she reports. The Rockies and Canada both suffer from wide basis differentials, and shale-gas plays have high development and production costs.

If a 10% increase in per-unit F&D costs from 2005 levels is assumed, the Nymex gas price required to generate a 10% after-tax rate of return is projected to be roughly $7.80 per million Btu in the Rockies, $7.35 in Canada, and $6.40 in such Midcontinent shale plays as the Barnett, Woodford and Fayetteville, she says.

September and October 2006 gas prices meant that, not including hedging, some gas producers were operating below economic thresholds. A few firms have already slowed activity, but if prices remain at or below present levels that slowdown will deepen, she adds.

Low gas prices are unlikely to persist, however, as reduced activity will tighten supplies, especially because so much drilling today targets reservoirs with high initial decline rates.

In the near-term, gas prices will fluctuate in response to weather patterns, economic outlook and storage levels. However, she predicts mid-cycle composite spot prices will be $6.90 per million Btu in 2007 and $7 per million in 2008, 2009 and 2010.

Meanwhile, Chesapeake Energy Corp. has shut-in approximately 100 million cubic feet per day of net gas production (125- to 150 million per day gross) in various areas in the southwestern U.S. until prices recover from low levels. Chesapeake's production is more than 1.6 billion cubic feet of gas equivalent per day (91% gas) and these shut-ins represent about 6% of the company's net natural gas production.

Aubrey McClendon, Chesapeake chairman and chief executive, says the decision is a "proactive approach to revenue management. So far this year through Aug. 31, we have realized approximately $740 million in cash gains from our natural gas hedges and, as of [the Sept. 26] market close, the mark-to-market gain on our remaining 2006 natural gas hedges was approximately $460 million...."

Kiley says, "Importantly, the company stated that this exercise was purely an attempt to maximize revenue given its view that natural gas prices will rebound at some time, and has nothing to do with marginal costs-which are currently around $1.50 per million Btu."

Chesapeake will likely revise its fourth-quarter production guidance downward when it reports third-quarter results, she adds. "From a net-asset-value perspective, curtailing production near-term effectively pushes those volumes out to the end of the life of the reservoir...In addition, we are concerned that shutting-in production could reduce operating efficiency and thus increase costs."

Smaller, unhedged operators may begin to scale back drilling activity if spot gas prices remain below $6, she adds.

Separately, Questar E&P Co., a subsidiary of Questar Corp., has shut in approximately 32 million cubic feet per day of net gas production (about 70 million gross) in the Rockies due to low prices. Despite the shut-in, Questar expects its 2006 production to total some 128 billion cubic feet equivalent, up from a forecast earlier in the year of some 127 billion.



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