From the Biweekly Report with data as of January 29, 2010


The drilling picture remains fuzzy for now. Since more than 65% of the active rigs are drilling for natural gas, and since we’re deep in the heating season, we wanted to spend a little time on the underlying fundamentals of this important commodity this time. It was only a few weeks ago that everyone was talking about the massive surplus of gas in storage. In mid-December, the YOY surplus stood at over 400 Bcf. As of last week, the surplus was reduced to 120 Bcf. Amazing what a few weeks of cold weather in the right places can do. However, weather forecasts look a little hazier. NOAA’s 3-month forecast calls for much colder than normal across most of the South. While this may stoke some extra demand regionally, this will likely be more than offset by warm weather in the Upper Midwest. Furthermore, predictions for the Northeast or Mid-Atlantic don’t lend much help either. Consequently, we view weather as a mixed bag through the end of March.

Oil and gas companies are getting off to a fast start in 2010 as 20 more operators entered the field in recent weeks.  With respect to rig activity, The Land Rig Newsletter Biweekly Report’s first issue of 2010 noted a 6% surge in the overall rig count compared to yearend.
 
The good news is that gains were generally widespread.  The shallow rig count (<5,000 ft) grew as operators sought oil, lifting the count by 41 to 148 rigs, with 32 of the additional rigs chasing oil. The deeper rig count also rose, up 28 to 1,065 rigs. Rigs seeking gas in deeper pay rose by 50 to 758 rigs; however, oil-seeking rigs in the Traditional count (>5,000 ft) dropped by 22 to 307 rigs. Top gains were in the Permian Basin and the Rockies, with increases of 9 rigs and 13 rigs, respectively.  Major unconventionals remain in the driver’s seat—notably the Haynesville, up 10 rigs to 114, and the Marcellus, up 5 to 70.

From the Biweekly Report with data as of September 24, 2010


So what’s next? The number of rigs drilling for gas is likely to slide further in the near term, given fundamentals. We expect losses in gas activity to be partially offset by gains in liquids. Hence, we expect recent trends to continue. Additional headwinds to gas could be on the horizon if the moratorium on offshore drilling is lifted, given that roughly 15% of U.S. natural gas production comes from offshore sources.

From the January 2010 issue of The Land Rig Newsletter:


EOG Resources sees a long life for its Bakken production, but doesn’t want to wait for new pipeline takeaway capacity in North Dakota to market its burgeoning oil output there. On Dec. 31, 2009, the company loaded the first cargo of Bakken crude oil at its new rail terminal at Stanley, ND, to travel via rail and pipeline for ultimate delivery to Cushing, Okla. Plans call for EOG’s rail system to have a maximum capacity of 60,000 gross barrels of oil per 100-unit train per day, although initial shipments may be less frequent.


EOG also is mulling buying third-party crude to bolster the rail shipment scheme. The company’s impatience on waiting for new pipeline capacity is also warranted by the depressed value of Bakken crude. Because of a lack of takeaway capacity, Bakken crude has been getting discounted as much as $10/barrel vs. NYMEX crude.

As has been the case for much of the year, gas shale plays were the main story at the end of the year. Even as the traditional (>5,000 ft) U.S. rig count slipped in sequential biweekly periods for the first time since end-September, the tally of rigs drilling in the five major gas shale plays remained fairly steady as of December 31.

 

In November, the collective rig count for the five major gas shale plays topped 300 and since then has stayed near that milestone, matching a level last seen in January 2009. The dramatic year-long gains in the Haynesville and Marcellus have been noted, as has the steady drilling pace in the Fayetteville and Woodford in second half 2009. Meanwhile, the Barnett—hardest hit among gas shales in the downturn—has quietly extended a rig-growth trend since the end of summer. The play now has 78 active rigs, a 142% increase in rig count over the past 18 weeks.

From the Biweekly Report with data as of January 15, 2010

Earlier this month, the EIA issued its first Short-Term Energy Outlook for the year. All things considered, it was chock full of positives from an industry perspective. Oil and gas prices are both expected trend higher, and supply and demand fundamentals are expected to improve. In 2010, the EIA estimates West Texas Intermediate will average $80 per barrel and Henry Hub gas will average $5.36 per Mcf, up 29% and 32%, respectively. Looking at the fundamentals, the EIA projects higher demand for liquid fuels in 2010. Furthermore, the administration expects demand for natural gas to remain flat year-onyear. Welcome views indeed. One caveat: This is all predicated on 2.0% GDP growth for the year, which is highly uncertain, as we all know.