GHS: All We Want For Christmas? Fewer Gas Rigs

"There is little question that a picture is worth a 1,000 words. And for natural gas producers, those words may include some of George Carlin's "7 Dirty Words," Michael Bodino, director of energy research at Global Hunter Securities LLC, jokes in a Dec. 22 research report.

On a serious note, the firm has continued the ongoing discussion, "How many rigs does it take to keep production flat domestically?" with a look at certain historical highs and lows in both domestic rig counts and production.

"We started thinking about enhancements in productivity and the proliferation of horizontal drilling and completion technology that has led to rapid production growth and the need for fewer overall rigs to generate growth," Bodino notes.

Louisiana is one of the best examples of this, according to the research director. Until May 2008, the state had an average of 156 total gas rigs running, including just one or two horizontal gas rigs. Production remained flat at just under 3.7 billion cubic feet per day (Bcf/d). "Then along came the Haynesville, and while the overall rig count during the past two years has averaged 145 rigs, horizontal rigs represented an average of around 100 rigs," Bodino says.

Currently, horizontal rigs comprise more than 80% of the overall rig count, and "superior" productivity of the horizontally drilled wells has driven production to more than 6.5 Bcf/d. Meanwhile, the difficulty lies in how to determine the number of rigs needed to keep production flat.

Looking at more mature areas in Texas for the key to a balanced rig count may be telling, however, according to Bodino. Because of the Barnett shale, the horizontal rig count steadily rose from 2005 through third-quarter 2008. And, with 400 vertical rigs targeting primarily the Cotton Valley and 100 horizontal rigs increasing to 300 rigs, Barnett production soared from 14.5 Bcf/d to nearly 20.5 Bcf/d.

"Then the music stopped," Bodino says, pointing to a collapse in the Texas gas rig count from 700 to under 300, including a drop in the horizontal rig count from just under 300 to around 120. Production subsequently declined 10%.

Although the horizontal rig count has returned to its highs, the vertical rig count has never recovered as many of the targeted reservoirs remain economically challenged, Bodino continues. "Still, the current count of around 400 total gas rigs, about 75% of which are horizontal rigs, appears to have been enough to stabilize production in Texas," he notes.

Similar to Texas, the rig count in Oklahoma ramped up from 2005 to 2008, with much of the horizontal rig count directed toward the Arkoma Woodford shale. Then, when gas prices fell, production took a hit. But as the total rig count moved back toward 115 rigs (90 horizontal), production began to stabilize. However, much of the rebound in rigs has been directed toward western Oklahoma, Bodino maintains.

"In Louisiana, Texas and Oklahoma, there has been a clear trend toward horizontal drilling and less vertical rigs running as a percentage. However, some states have yet to have an abundance of horizontal drilling opportunities," Bodino says. "Looking below at New Mexico and Wyoming shows the lack of impact on production as the rig count has fallen."

During the last five years, the gas rig count has had a steady decline in New Mexico from around 70 rigs to less than 15, and gas production has fallen from 4.5 Bcf/d to 3.5 Bcf/d, according to the research director. In the past few months, however, gas production appears to have flattened and is now holding its own on a lower rig count, Bodino notes.

In Wyoming, the story is a bit different, Bodino adds. Due to infrastructure bringing stranded gas to market, a reasonable flat rig count between 2005 and 2008 aided in production growth from less than 4.5 Bcf/d to more than 6.5 Bcf/d. "Recently, however, production (from around 35 rigs) appears to have rolled over and is starting to decline," he says.

Bodino says Global Hunter concurs on two points: there is little question that the supply shift in the U.S. has created some regional supply and price changes; and horizontal drilling has transformed supply dynamics, particularly in the shales.

"As we sit today, the Haynesville and the Marcellus are still ramping, but the Barnett, Fayetteville and Woodford have begun to roll over," he reflects. "And regardless of rig count, production will ultimately find its level and flatten." In the meantime, "there are too many or too few rigs running in many of these states," Bodino contends.

As for the industry's resolution in the new year? "For the gas producers, we hope for fewer Haynesville horizontal rigs and an erosion of the number of wells waiting on completion."