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Hope builds for natural gas; two Canadian producers see recovery
Not all natural gas producers are wearing a look of gloom and despair these days.
EOG Resources and Paramount Energy Trust are both betting that the market will stage a recovery within a few months.
EOG Chairman and Chief Executive Officer Mark Papa estimates North American supplies will drop by 4.9 billion cubic feet per day in the United States and 800 million cubic feet per day in Canada, regardless of what happens to LNG imports, and fortunes will turn in early 2010.
He told analysts that gas prices will remain “quite low” through the rest of 2009 before recovering in 2010 and 2011.
The key he said is vertical production in Texas, which he described as the “800-pound gorilla in the room,” not the highly touted output from new horizontal shale plays.
Texas vertical wells the issue Papa noted that Texas vertical wells account for the largest single chunk of U.S. production at 16.3 billion cubic feet per day at the end of 2008 from a region where the rig count has slumped this year to 145 from 450.
“Our model shows this production … will fall to 13.2 billion cubic feet per day by year-end 2009, then to 11.6 billion cubic feet per day by year-end 2010,” he said.
Papa said 47 percent of EOG’s July-through-December 2009 North American gas is hedged at $9.03 per thousand cubic feet and “only a small amount” of first half-2010 gas is hedged at $10.27.
“Based on our macro view, we’ll likely remain primarily unhedged for 2010,” he said, offering one of the most bullish industry views yet about the near to medium term.
Without getting into specifics, Papa said EOG has been involved in discussions with the British Columbia government about royalty “allowances” to make the Horn River shale play competitive with similar horizontal plays in North America.
“The B.C. government has recognized the Horn River gas is competing with the Haynesville, or the Barnett, or the Fayetteville gas and they have taken very proactive steps,” he said.
“We’re very pleased with the situation as it’s turned out in relationship to the government royalties and EOG’s position (in Horn River).”
Prices below replacement value Paramount Chief Executive Officer Sue Riddell-Rose based her forecast on a market turnaround in the medium term on a number of factors, notably the fact that current prices are below the replacement value to find, develop and produce.
“We will see a recovery and we will see a recovery that will be very strong,” she told a conference call.
In the meantime, Paramount’s average second-quarter production was down 23 million cubic feet per day from 188.4 million cubic feet per day a year earlier.
Because of the nosedive in gas prices, Paramount is making a detailed analysis of all of its properties to preserve value through voluntary production cutbacks, believing there will be a gain in present value through the deferral of production until prices stabilize.
It said production deferral has the added benefit of preserving reserves and the related lending value under the trust’s bank credit facility.
As a result, in addition to its second-quarter shut-in, Paramount shut in a further 15 million cubic feet per day in early August.
—Gary Park
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