Drilling cutbacks planned

by Stephen Crane

Amid the recent downturn in the national economy, coupled with falling energy prices, local operators in the gas industry have recently confirmed that development will be slowing for the upcoming year.

“There’s no point in drilling if you won’t be able to sell the gas from it when you get it drilled,” said Paul Matheny, vice president for the Rocky Mountain region of Questar. “Or you sell the gas, but you get such a low price for it.”

Of the largest natural gas companies in Sublette County, including Questar, Shell, Ultra and EnCana, three of those four acknowledged that 2009 would see cutbacks and restructuring of their current production efforts, though no direct employment by these companies will be affected.

Only Shell is “continuing with our program, as we have it defined,” according to James Duran, Shell spokesperson.

For the other three companies, two factors are contributing to the recent decision to cut costs and streamline the efficiency of production — limited pipeline infrastructure and the national economic downturn.

Currently at $5.68 and down from over $13 in early July, the price of natural gas has been plummeting. And in a simplified sense, supply and demand are determining factors.

“Historically, it hasn’t gotten to the level where we need to cut our drilling,” said Matheny. “But that’s what’s happened in the last four or five months.”

In Wyoming, the supply is at capacity, and there is not adequate pipeline available to transport the fuel in an efficient manner, even for those who might demand it. The result is that the regional price of natural gas is even lower here than in other parts of the country.

“There’s a continued capacity in the pipeline,” said Randy Teeuwen, EnCana spokesperson. “So we’re still confronted with a situation where we can’t get gas out of Wyoming.”

“It is a pipeline issue,” Matheny echoed. “And when that happens, the regional gas price goes down. So we have less money coming in, which means there’s less money spent on development.”

According to Matheny, gas companies traditionally invest 100 percent of its revenue back into development, coupled with an additional 20 to 30 percent in loans. So if the price drops, there is less money available to reinvest. And because the companies rely on creditors for that additional 20 to 30 percent, the recent downturn in the economy has made additional funding difficult to secure.

“You can’t go out and borrow money to spend on drilling, even if you wanted to,” said Matheny.

In Sublette County, both EnCana and Ultra will be scaling back rig counts in the upcoming year.

“In terms of our drilling program in 2009, we’re going to average nine rigs,” said Teeuwen. “We’ve had 11, most recently, 11 rigs in Jonah. We’re going to reduce that to seven. And we’re going to maintain two in our Wind River operations.”

Teeuwen also said that the approximate 160 wells that were projected for 2009 have, been reduced to about 115, adding that $450 million has been budgeted for Jonah in 2009, down from $600 million in 2008.

For Ultra, the story is similar, though the exact numbers were still undetermined.

“We are looking at releasing some rigs at the end of this year,” said Belinda Salinas, manager of environmental, safety and regulator affairs for Ultra. “The contracts are up, and it’s also a reflection of gas prices too. So we will be laying off some rigs.”

Questar is also scaling back production efforts in Wyoming, but not in the Pinedale Anticline Project Area.

“Right now, we’ve suspended our gas drilling in the Wamsutter area in southwestern Wyoming,” said Matheny. “So in Wyoming, that’s the changes we’ve made so far. And we’ll continue to revise our spending forecast based on economic conditions.”

When gas prices drop this low, energy companies are forced to evaluate all their production areas, trying to determine where development costs are higher when compared with production levels.

Many times, they adjust their production efforts accordingly, moving to areas where production is high and development costs are lower. Because Wyoming has such a low regional price for its natural gas, it’s often a target for cutbacks.

“We hold leases in areas of the country where we can produce more gas for less cost,” said Teeuwen. “So some of our assets are being shifted into those areas.”

If the price of gas were to normalize, jumping back up to previous levels, the forecast of development could change, but as it stands, the companies aren’t taking any chances.

“So far, there haven’t been (plans to increase production if the gas price jumps), but we reserve the rights to change the plans,” said Matheny. “Right now, we’re executing the plan we have.”

Energy companies, along with the rest of the country, are riding the economic waves. For those in the gas industry, the price of natural gas is at the heart of their predicament and is also difficult to predict.

“It’s a crystal ball filled with mud,” Matheny concluded.

“We keep our pencils sharp all the time,” said Teeuwen. “But during times like this, we are being very conservative in terms of our outlook and drilling program.”