Signposts

This month, E&P and service companies are in the final throes of tweaking their budgets and strategy for 2011. The most bedeviling uncertainties they face: the direction of natural gas prices and what government might do to derail E&P momentum.

It would help if we had a few guidelines for the coming year. Here are a few signposts for 2011 you won't want to miss.

Energy lobbyists and executives think the most clear and present danger will not come so much from Congress as from bureaucrats and regulators, especially from the Environmental Protection Agency.

Oil demand appears to be growing again. The International Energy Agency boosted its forecast for 2010 oil demand slightly, to 87.4 million barrels a day, due to stronger forecasts from North America and Asia. And in its December Oil Market Report, it said global crude consumption will average 88.8 million barrels a day in 2011, up 1.6% from 2010.

Here's one signpost we thought alarming. In fiscal 2010, the Bureau of Land Management issued 531 oil and gas leases in the West—fewer than in 2009, and a 79% drop from the 2,499 leases issued in fiscal 2005. What's more, since 2005 the BLM has offered 70% fewer acres, says a new study by The Western Energy Alliance (formerly IPAMS).

Then too, federal offshore lease sales were canceled in 2010, and maybe there won't be any until fourth-quarter 2011, if at all. Clearly this trend doesn't support enough domestic energy supply for the future. Luckily, production from the shale revolution offsets this somewhat.

At press time, the government issued clarifying memos about how offshore operators can satisfy new regulations for safety, drilling and spill response. But meanwhile, we hear that 72 shallow- and deepwater permits are in some kind of frustrating "permitorium" limbo.

Since June, only about 20 shallow-water permits have been granted, far below the normal number. The one ultra-deepwater permit filed, by Chevron, has been kicked back to the company for further details. If things don't get moving by summer, Petrobras warns, it will move its new FPSO back to Brazil instead of using it to bring onstream the Cascade and Chinook fields.

For onshore drilling and completion activity that is occurring, signposts indicate costs are not falling, and most services remain as tight as ever.

The U.S. rig count has traditionally been another signpost. The December 10 count showed 763 rigs drilling for oil, up a stunning 94% from 12 months earlier. Some 948 gas rigs were working, up 25% from a year earlier. More rigs need to switch to oil plays, and most expect that they will do so throughout 2011.

The hot plays to watch in 2011 will include the Eagle Ford, Marcellus, Granite Wash, Woodford Cana, Lower Bossier shale, the westward extension of the Bakken, and the Niobrara in Colorado and Wyoming.

The Energy Information Administration estimates gas production rose 4.2 billion cubic feet a day through September over the prior nine months, and production has reached 62.09 Bcf a day. Still, the market is oversupplied by 1.7 billion a day.

Wells Fargo analyst Michael Hall sees this oversupply lasting into 2011 and potentially beyond. Credit Suisse analysts think U.S. gas production "will finally begin to turn lower in 2012, as producers rein in drilling and the sizeable unconnected well inventory is depleted."

Looking even further ahead, coal-plant retirements and/or plant retrofits "should amplify demand through the balance of 2015, enabling prices to recover," the firm says.

Boosting gas demand, as opposed to further improving technology, is more important for improving shale economics, says Allen Brooks, managing director at Parks, Paton, Hoepfl & Brown. His Energy Musings report appears on our website semimonthly.

For demand, here's an unexpected signpost we almost drove right by: The Worldwatch Institute recently said gas and renewable energy could partner to move the world toward a low-carbon future. The report argues "natural gas has the right combination of flexibility, scalability, and cost-competitiveness to complement the variable, distributed nature of wind and solar-power generation…natural gas must realize its full potential as a partner to the renewable energy industry."

This month we introduce a new column, Insights, which is part of an exciting new effort, Hart Energy Consulting. In coming months we'll publish reports on upstream issues such as international shale opportunities, shale-completion technologies and the Gulf of Mexico, among other topics.

Who rose above the crowd in 2010? We eagerly await your nominations, of your own company or another, for the annual Oil and Gas Investor Excellence Awards. These will be awarded at our Energy Capital Conference in June. Categories include Executive of the Year. Best Discovery, M&A Deal of the Year, Best Financing, Best Field Rejuvenation, Best IR Program and Best Corporate Citizen.

Please send your nominations to me at lhaines@hartenergy.com.