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Gas prices could dip below $3 this summer, but US onshore rig count expected to rise

Posted on 24 May 2011

In the short term, “we’re still kind of stuck with crappy gas prices,” Jim Rollyson, Raymond James & Associates, told attendees at the IADC Drilling Onshore Conference on 19 May in Houston.

In the short term, “we’re still kind of stuck with crappy gas prices,” Jim Rollyson, Raymond James & Associates, told attendees at the IADC Drilling Onshore Conference on 19 May in Houston.

From a macro level, Raymond James & Associates has not changed its view of the outlook for natural gas in the US. “It still sucks, unfortunately,” senior vice president energy equity research Jim Rollyson said during a presentation at the 2011 IADC Drilling Onshore Conference & Exhibition on 19 May in Houston. On the other hand, however, outlook for drilling services is strong, and the US onshore rig count is actually expected to go up 10% a year for the next three to five years, he said.

Gas outlook still “sucks” primarily because of the supply glut while demand has not been able to catch up. “We’ve gotten really good at finding gas and developing gas in the shale plays and the unconventional plays where well productivity is five or 10 times better than it was just five years ago,” Mr Rollyson said. Over time, gas demand will likely rise as people invest in cheaper natural gas versus the more expensive oil, such as through gas power and natural gas-powered vehicles. However, the effects from those investments are not going to be immediate.

“We’re oversupplied in the gas market by about 1.5 bcf a day, and basically I think we’re going to have to shut in some gas this summer,” he said. “We’re making the bet that gas could go back under $3 this summer, similar to what happened in ’09.”

He attributed the recent run-up to $4.75 gas to weather, which bumped up demand on the commercial and residential side. Nuclear plants going offline also contributed to that increase. “We’ve actually got about twice as many nuclear plants offline for refueling and maintenance as we’ve had a year ago at this time, so that’s been helping us out,” he said. As these plants come back online over the next month or two, however, the US will still face a huge gas supply growth.

So how can the US onshore rig count rise in this kind of environment? The answer is $100 oil, Mr Rollyson explained. “There are tens of thousands of (drilling) locations that work in this oil price environment,” he said.

And even though shales get most of the media attention and headlines, many of the older plays are coming back into action as well. The Permian Basin, for example, will put a big demand on rigs going forward. “Even some of those older rigs are probably going to be coming back to work,” he said, though perhaps not at the same level of pricing seen in 2007 or 2008.

Newbuild projects will start to pop up again too, he added, and land rig utilization is headed back to 2008 levels. “Two to three years ago we thought there’s no way that was going to happen, that it was going to take gas getting back to $6, $7, $8 before we’d get back to the ’08 peak in rig activity so a lot of the older rigs and certainly the need for newbuilds was going to be kind of off the table,” Mr Rollyson said. “And here we are, just a couple years later, and we’re back there and probably headed higher over the next four, five years. I would say that’s a pretty good outlook.”

“We think we’re in the early stages of a long-term secular bull market for activity onshore US,” he concluded.

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