LITTLE ROCK — Steve Mueller, chief executive officer of Southwestern Energy Co., the largest producer in the Fayetteville Shale, said in an interview this week that if natural-gas prices don’t rebound in the next five to seven years the Houstonbased company would reduce its drilling in the state by thousands of wells.
The company announced Feb. 9 that it would remove one rig of the 11 it has in the formation in north-central Arkansas this year, along with other strategies to reduce the gas it produces.
Southwestern has estimated it will drill about 8,000 wells in the next 15 years in the Fayetteville Shale. Starting in 2004, Southwestern has drilled about 2,500 wells through the first nine months of 2011, according to company records.
Using horizontal drilling and hydraulic fracturing, Southwestern and other companies across the country have produced a glut in the natural-gas supply, driving down prices to near 10-year lows.
“What could happen — and I’m not going to say it is going to happen — but because the unconventional [formations] are so strong ... we’re in a long-term low price environment,” Mueller said in an interview Thursday. “That would mean ... we really don’t have 8,000 wells to drill; we have a lot smaller number to drill.”
Natural-gas production in the Fayetteville Shale and elsewhere is a double-edged sword. While the low prices have hurt producers, consumers benefit.
James Williams, an energy economist with WTRG Economics near Russellville, said the prices have likely hit rock bottom.
“Heating your home is a lot cheaper, and power generation is cheaper. But it’s likely as good as it’s going to get.”
Michael Pakko, chief economist for the Institute for Economic Advancement at the University of Arkansas at Little Rock, said “drilling activity is valuable to the economy because it is keeping people employed. Those people’s spending has spillover effect on [the] rest of the economy.”
Also, mineral-rights leaseholders received about $1 billion in royalties and one-time signing bonuses from 2005 through June 2011, according to the Arkansas Independent Producers and Royalty Owners Association. The state’s general fund has received $5.25 million from the severance tax between March 2008 and July 2011.
Natural gas Friday on the New York Mercantile Exchange for March delivery was $2.68 per thousand cubic feet, up 4.6 percent on the day, and up from a 10-year low hit Jan. 19.
Mueller said that if gas prices were to stay around $2.50 for four or five years, production in the Fayetteville Shale would cease.
“If you said you had $2.50 gas for the next five, six, seven years, and it didn’t go above $2.50, there is no economical well in the Fayetteville Shale, there are few economical wells in the country,” he said. “What we would do is lay down all of our rigs and stop operating.”
During a Credit Suisse Energy Summit in Vail, Colo., on Feb. 9, Mueller said that if gas prices stayed at $3, Southwestern would drill 1,100 to 1,200 wells in the Fayetteville Shale over the next 15 years; at $3.50 it goes up to 2,500 wells; at $3.75 it would be 4,000 wells; and at $4 it would be 8,000.
Mueller said Thursday that the company looks at what prices are for the next two years and what it expects in the next five years. Natural-gas prices a year from now are currently about $3.75 per thousand cubic feet in New York. For February 2014, prices are $4.23.
This year, Mueller said, Southwestern has already sold about 46 percent of its gas from all of its production for $5.16. And about 30 percent of the gas it expects to produce in 2013 has been sold for $5.06. The vast majority of Southwestern’s gas comes from the Fayetteville Shale.
Prices have rallied in recent days and weeks as companies such as Southwestern; Chesapeake Energy Corp. of Oklahoma City, the second-biggest natural-gas producer in the U.S.; and BHP Billiton have all reduced their natural-gas production expectations for this year.
Chesapeake, which sold its assets in the Fayetteville Shale to BHP, said recently that it would cut production by 1 billion cubic feet this year. When BHP started working in Arkansas, it said it would raise the number of rigs to about 20 from eight; now it says it will reduce the number of rigs to five or six.
Baker Hughes Inc., an oilfield services and research company based in Houston, said the number of naturalgas rigs working in the U.S. is down by 189 from a year ago to 716.
But just because companies are reducing the number of rigs doesn’t mean the total U.S. supply will immediately decline.
According to a research paper by Raymond James, a financial services and holdings company based in Florida, the supply will increase as companies switch from fields that produce only natural gas to fields that produce both oil and natural gas. Analysts said about 35 percent of U.S. natural gas is produced from wells that primarily yield crude oil, the Dow Jones news service reported.
“We anticipate that gas supply declines from dry gas basins will be more than offset by growth in associated gas volumes from ... oil plays to the tune of over 2 [million cubic feet per day] of supply growth in 2013 and beyond,” the research paper said.
As a result, Raymond James lowered its 2013 forecast to $3.25 from $4 per thousand cubic feet and its long-term outlook to $4 from $4.50.
Mueller said beyond lowering the total U.S. rig count, there needs to be stronger demand from power generation in order for prices to rally. That is starting to happen.
The use of coal to generate electricity will drop 2 percent this year, to its lowest level since 1992, according to the U.S. Energy Department. Natural-gas-fired generation is expected to rise 5.6 percent.
But Raymond James doesn’t think the switch will offset supply enough to substantially raise natural-gas prices.
Mueller said lower prices will attract more power generators to natural gas, which will lead to an increase in demand over the next four to five years.
“Assuming the laws of supply and demand work, prices should rebound,” he said. “We don’t expect $3 gas forever.”
Business, Pages 31 on 02/18/2012