Conoco Phillips, the US’ third biggest oil and gas company, said today it scaled back north America natural gas production late in the third quarter by about 180m cubic feet equivalent per day. It did so because of low natural gas prices, under constant pressure from the shale gas production boom.
Jim Mulva, Conoco’s chief executive, said the company easily could have boosted its production for the quarter, which would have meant a rise in overall production – something analysts always hone in on when evaluating Big Oil’s results. But it didn’t make sense given where US gas prices were - even if Conoco could break even by producing the gas.
Mr Mulva said the gas prices of today for US natural gas (around $3-$4 per million British thermal units (mBtu), down from the record $13.69 per mBtu reached in 2008) are “unsustainable”. And the company believes it better to wait to produce its gas until it can get more for its money. Makes sense.
But the good news for Conoco is that its shale assets are not all gas. It is in the liquids-rich parts of the Eagle Ford, Bakken and North Barnett shales, where investors have been increasingly moving to extract natural gas liquids and oil from the tight rock. Conoco plans to spend $1bn more drilling and completing wells in the Eagle Ford alone next year, underlining its high expectations for the area. That will be part of a $13bn capital spending budget.
Mr Mulva told analysts he was reserving a couple of billion dollars in case the right assets became available, whether in the Gulf of Mexico, or elsewhere. But he sounded most excited about his shale plays, saying, “We’re really getting more and more encouraged all the time.”
Indeed, it is this shift into liquid shales that could well be the salvation of the US independents, which have been hit hard by the drop in natural gas prices. As Bernstein Research says in a new report:
The desire to expand oil drilling is almost universal among North American E&Ps, as echoed by management teams of both oil-leveraged Occidental and Talisman, as well as gas-leveraged EOG and Chesapeake… EOG’s entire corporate strategy is directed at transforming the company from gas-leveraged to oil-leveraged.
Conoco is not one of these small independents who was getting overly hit by low gas prices. But its strategy to hold off on gas production and focus on liquids mirrors that of the little guys. For now, at least, whether you are a small or big producer, the US’ onshore gas boom is really a bust.