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Chesapeake cut might mark the turn for US gas

 
24.01.2012

Chesapeake, which has arguably been the most aggressive company leading the charge into shale gas in the US, has announced plans to cut the number of active rigs drilling for dry shale gas by almost 70% YoY in 2012. Chesapeake is also to curtail production of 0.5bcfd (5.2bcmpa) and restrict completions and tie ins. That cut represents 9% of US daily gas production and might be doubled. US gas prices, which had held around the USD 4.00-4.50/mmbtu mark (USD 141-159/mcm) until the summer, collapsed into the winter season dropping as low as USD 2.32/mmbtu (USD 82/mcm), just prior to the Chesapeake announcement, as US gas production continued to ramp up and the winter proved warmer than average.

Most research indicates that dry shale gas drilling on average needs USD 5- 6/mmbtu (USD 177-212/mcm) to be profitable using current technology and after allowing for land acquisition costs. That is backed up by anecdotal comments from within the industry. The question has long been why dry shale gas drilling has held up as well as it has done. The most common arguments are that drilling carries, forward hedging and drilling in order to hold leases by production have supported extraordinarily high levels of ongoing drilling. In fact, gas drilling has been in decline since 2009 as the industry has shifted to the aggressive drilling of liquids-rich shale and other ‘light tight oil’ plays as the oil to gas price ratio has blown out.

The catch now is whether gas production associated with liquids rich shale production is sufficient to keep the pressure on US gas prices. However, the scale of Chesapeake’s action suggests that further major reductions in drilling is on the cards if US gas prices do not recover substantially. Chesapeake’s announcement might well mark the turning point for US gas prices, we believe.
Colin Smith
VTB Capital analyst

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