Collapsing gas market fundamentals recently drove both October Nymex gas futures and Henry Hub spot gas prices to four-year lows, well below the average economic threshold price-based on a projected pretax internal rate of return of 20%-identified in 25 prominent gas resource plays. However, with a median threshold price of $5.40, virtually all of these plays generate attractive economics at current 2007 futures prices ($8.27), and roughly three-quarters of the plays yield attractive economics using a long-term price forecast of $6.25. The best plays (Jonah/Pinedale, the core Barnett Shale and the East Texas Freestone) generate attractive returns even assuming a $4 Nymex price and current costs, while lower-return plays typically occur in less prolific Rocky Mountain basins currently beset by gas-on-gas competition and wide basis differentials. Based on recent realized Rocky Mountain prices in the $3 to $4 range and current cost structures, few projects, aside from Pinedale in southwestern Wyoming, are capable of generating adequate returns in the region. Most plays, however, generate acceptable well economics based on a long-term gas-price forecast of $6.25. For example, a typical Mesaverde well in Utah's Natural Buttes Field has an internal rate of return of 25% at $6.25 and realized price of $5.25. The IRR jumps to 40% on the recent 12-month strip of about $7.73 held constant for the life of a well. Most capital-spending decisions will hinge on the latter figure. Therefore, if the 12-month Nymex strip sags below $5.50, anticipate capital spending cuts in virtually all of the gas plays in Utah's Uinta and western Colorado's Piceance basins, where more than 100 rigs are actively drilling. For more on this, see the December issue of Oil and Gas Investor. For a subscription, call 713-260-6441.

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