Turning Away From Gas

The industry has played Taps for the Huron shale. At least for now, the day is done for this formerly up-and-coming shallow-gas play underlying Kentucky, West Virginia and eastern Ohio. A casualty of the 2012 collapse in natural gas prices, the Huron was the original focus for the Appalachian oil and gas industry until the Marcellus shale supplanted it in 2008.

The Huron effort came to an end in early 2012, when EQT Corp. pulled the plug on its activity there.

“For us, it was a fairly difficult decision, but it was a straightforward decision economically ,” Steve Schlotterbeck, EQT senior vice president for exploration and production, told attendees at RBC Capital Markets’ 6th annual Global Power and Energy Conference held in New York in June.

“EQT developed a lot of the specialized technologies used in the Huron, so a lot of us had a particular attachment to that play,” Schlotterbeck said. “Now that we have shut it down, it is going to be difficult to restart it.”

The Huron needs $4-plus gas to return anything more than EQT’s cost of capital. It would take a $6-gas world for the Huron to work, Schlotterbeck said.

Low gas prices have other operators revising their capex budgets as well, and several discussed their responses to the changing market at the RBC conference. Left unresolved is when U.S. natural gas production will respond to reduced capital spending and a lower rig count.

Canada’s Talisman Energy responded to the drop in gas prices by severely cutting its Marcellus spending. The company began 2012 with a $1-billion Marcellus program involving 11 rigs. It reduced that to a one-rig, $100-million program after 90 days.

Ironically, Talisman’s Marcellus gas production is continuing to grow, and reached 550 million cubic feet equivalent per day by the end of May. Scott Thompson, the company’s chief financial officer, said he expects gas production to drop to 450 million equivalent per day by year-end, and eventually to decline to 350- to 375 million per day.

Thompson foresees a two-year window of breathing room for the company, although if gas prices stay where they are through 2014, it faces a tough choice. “It’s not as easy as saying we are going to cut activity and let leases walk out the door,” Thompson said. “Maybe that’s the best economic decision, but we have to think about the long-term health of the business.”

Meanwhile, Talisman is redirecting capital in the U.S. away from the Marcellus and into the Eagle Ford shale. The Eagle Ford will garner 62% of the company’s 2012 capital spending on liquids out of an overall North American budget estimated at $1.4 billion.

Southwestern Energy Corp. is also adjusting to low gas prices by cutting drilling activity, though the company is in a good position to weather a weak-commodity-price storm.

“We don’t plan for a certain price, we plan for a low price,” said Steve Mueller, Southwestern Energy Corp. chief executive officer. “We’ve all been through the situation from 1986 to 1998, when we had a long-term gas bubble, so part of what we think about is that this could be a long-term issue, not just a one-year or two-year issue.”

Southwestern is drilling only its most economic gas wells and has cut its Arkansas Fayetteville program from 600 wells in 2011 to 400 in 2012.

“What we have done is changed our whole business structure,” Mueller told RBC attendees. “We are only drilling our very best wells in the Fayetteville shale. If it is $3 flat forever, we still have 1,200 wells to drill.”

Southwestern also plans to continue drilling dry-gas wells in northeast Pennsylvania, where the company will invest $600 million, including for midstream operations, in 2012.

“In the Marcellus it’s a little bit different. We’re in Susquehanna and Bradford counties, some of the best counties for dry gas in the country,” he said. Southwestern generates a 20% return at $3 gas and notes that 900 of the company’s 1,000 locations in northeast Pennsylvania work at a $3-gas price. The company is tactically drilling to fill out firm capacity it has purchased on the Constitution Pipeline and is operating a two-rig program targeting 70 to 80 wells in 2012.

While the gas rig count is down, it remains an open-ended guess as to when domestic gas production will finally roll over.