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Price rise no lift for shale, analysts say

By Jessica Seaman

This article was published December 19, 2013 at 3:35 a.m.

A recent jump in natural gas prices will likely spur drilling nationwide, but it will have a minimal effect on activity in the Fayetteville Shale where exploration for the resource has lagged in the past few years, analysts say.

After almost three years of low natural-gas prices, the cost of natural gas rose above $4 per 1 million British thermal units two weeks ago because of the freezing conditions gripping the nation.

But natural-gas prices, which were $4.25 per 1 million Btu for January delivery on Wednesday, need to climb even higher to draw drilling rigs back to Arkansas, analysts say.

“Higher natural-gas prices would lead to more drilling,but a better way to think of it for the Fayetteville Shale, it means drilling won’t be reduced further,” said an energy analyst who didn’t want to be named.

Drilling in the Fayetteville Shale has tapered in the past two years as companies have shifted attention to oil and liquid natural gas areas, which are more profitable when compared with the low market price of natural gas.

“It’s still a good field; there are still better ones,” the energy analyst said of the Fayetteville Shale.

Southwestern Energy Co. plans to invest about $900 million in the Fayetteville Shale next year, the same amount the Houston-based company projects it spent this year, according to Southwestern Energy’s Capital Program and Guidance report for 2014.

“They do not need to accelerate activity at this point,” said Andrew Coleman, an analyst with Raymond James & Associates. “In this gas price environment, that’s what a lot of managers are looking at: How to squeeze a little more return out of the same activity.”

Coleman said Southwestern Energy is putting a lot of effort into finding another formation to drill, possibly one with oil.

A spokesman for Southwestern Energy referred to the guidance report, which was released earlier this month, when asked if the increase in natural-gas prices would influence its operations in the Fayetteville Shale.

“Though pleased with improved prices, we have not made any such operational changes for the current fiscal year,” said Danny Games,spokesman for BHP Billiton Ltd in an emailed statement.

BHP Billiton halted drilling in the Fayetteville Shale earlier this year and has no rigs operating in the state, he said.

Suann Lundsberg, a spokesman XTO Energy, a subsidiary of Exxon Mobil Corp., said the company “takes a long-term approach to the business and we manage normal fluctuations in the oil and gas industry cycles to economically develop our acreage.”

XTO has one rig in the state.

“We will continue to evaluate economic opportunities within the current business environment. The Fayetteville [Shale] continues to be an extremely important area for XTO within our Mid-Continent Division’s operations,” Lundsberg said.

One sign of the slowdown in activity in the Fayetteville Shale is the number of drilling rigs operating in the formation.

“[Drilling rigs] are at a low - the lowest number statewide since the Fayetteville Shale came into full production,” said Kelly Robbins, executive vice president for Arkansas Independent Producers and Royalty Owners.

In July 2008, Arkansas saw its rig count peak at 60, Robbins said.

On Wednesday there were 11 rigs in the state, with nine in the Fayetteville Shale, according to Baker Hughes, an oil-field services company.

Robbins said the expanded use of natural gas, such as in home heating, will help increase the rig count by lifting prices.

“It would take a little while to move in a rig,” Robbins said. “They don’t just come back overnight. It will take some time to return, and to return they need to know that there is some longevity and higher market prices.”

But, he said, “just being … north of $4 is certainly a positive time. We haven’t seen those kind of prices in many, many months.”

When drilling peaked in Arkansas in 2008, natural gas prices were between $6 and $10 per 1 million Btu on the New York Mercantile Exchange, but in 2012 prices briefly plunged below $2 per 1 million Btu and failed to reach $4 because of warmer winters and abundant supply.

“This will be the first time we have seen $4 since 2011,” said James Williams, an energy analyst who operates WTRG Economics near Russellville.

Analysts said natural-gas prices need to reach at least a steady $4.50 per 1 million Btu for activity to pick up in the Fayetteville Shale.

“I would drill in those others, than in Arkansas because the liquids will get me more money, even at $4.50, but at $4.50 you’re going to get a decent return [in the Fayetteville Shale],” Williams said.

He said the weather this winter will determine how long natural-gas prices stay above $4 per 1 million Btu, contingent upon how much gas is in storage.

The U.S. Energy Information Administration said in its latest report that natural gas inventories have fallen as consumption increased because of the colder-than normal weather in November.

“We haven’t officially entered winter yet and we’ve already had snow,” Williams said. But if this winter is mild “we will be back down below $4,” by summer, he said.

Business, Pages 26 on 12/19/2013

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