Sheila McNulty Exporting shale gas could keep US producers in business

The shale boom keeps getting better and better. A new report by PFC Energy, the consultancy, shows that the already generous estimates of production from the huge gas field known as the Marcellus Shale were not big enough. Apparently a Pennsylvania law kept well data closed for five years up to August. Now that the data is out, the results, PFC says, are startling.

As of August 1st, the Pennsylvania Department of Environmental Protection (DEP) required that Operators submit the 12 month production records for the dates beginning July 2009 and ending June 2010. After compiling and organizing the data, the DEP released the well production records for those companies which participated in the data submission and the results display some interesting and unique insights into why the Marcellus truly is different than the rest of the shales. An in depth review of the reported well production data shows that the Marcellus Shale appears to be behaving differently than the other shales, with decline rates now estimated at  – 15% as opposed to prior view of around 60%.  These results place the Marcellus wells in an entirely different category from those in other basins.

So if production is not declining as rapidly as was thought, that means US gas production has room to grow even more robustly than anticipated. And as good as that sounds, the US natural gas market already is so glutted, and prices so low, that some companies are contemplating spending millions of dollars converting natural gas import terminals to export terminals and turning the US into a natural gas exporter.

This would certainly be good news for producers now so overwhelmed with gas they are finding it more cost effective to abandon leases than drill (as required to hold onto the leases) in hopes of producing when prices rebound. A new report by Credit Suisse Equity Research underlines the gravity of the situation:

We are beginning to see signs of slowing from select natural gas-focused producers. Recently, GMX Resources (GMXR) cut its 2011 capex guidance by 13 per cent as it plans to sub-lease three of its four contracted rigs. Sandridge Energy (SD) noted it had dropped from 8 rigs to 1 in the gassy Pinon Field of West Texas. Devon Energy (DVN) has signaled it will de-emphasize gas production as it focuses on West Texas and Canada oil properties. CHK has also stated that it will reduce its ‘HBP’ rigs (those running to hold leases) from the current ~45 range to 30 by year-end 2011. HK signaled it can reduce its Haynesville rig count by 35-15 per cent versus current levels (14 rigs) in the event of $4-5.00 per MMBtu gas and is also open to letting leases expire in order to preserve capital. EOG has also stated it will let certain non-core leases expire in the Haynesville Shale.

As George Mitchell, the father of the shale gas revolution, puts it:

We’re now producing more gas than we’re selling. It’s getting very competitive at $4 to make it profitable.

Which leads me back to exporting. Certainly it seems hard to contemplate that a country so consumed by energy security would export its fuel. But the Obama administration and Congress have yet to recognize the significance of natural gas as a fuel that could help reduce the country’s carbon footprint.

It is the least polluting of the fossil fuels, the go-to backup fuel for intermittent wind and solar, and has the potential to power either electric or natural gas vehicles. But if the US does not see the value in building the infrastructure to take advantage of the natural gas, why not export it to the highest bidder? That way US producers can find their way to back to profitability.