Sword Of Damocles Hanging Over Natural Gas Market

By Eric Fox | August 25, 2009 AAA

The large number of drilled but uncompleted wells in North America may be the sword of Damocles hanging over the head of the exploration and production industry, as many companies are waiting for the price of natural gas to move higher before allowing these wells to enter production. The industry prefers to wait, as much of the value of these wells are realized in the first few years due to the high initial decline rates of unconventional resource plays. It may also be a selfless effort to balance the market as well.

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If and when natural gas prices recover, there will be an avalanche of completions, which will lead to a flood of natural gas into inventory, possibly tripping the cycle down once again.

Carrizo Oil and Gas (Nasdaq:CRZO) reported during its second quarter conference call that it had 39 net wells in this status, and that the initial production on these wells are about 87 million cubic feet equivalent per day. Chip Johnson, the CEO of Carrizo Oil and Gas said that a $6.00 per Mcf natural gas price would be needed for the company to start completing these wells, and that it could do them at a rate of one per week.

Quicksilver Resources (NYSE:KWK) also said that it was deferring some completions due to low gas prices and that its "inventory of drilled and cased but uncompleted wells" would reach 150 wells by the end of 2009.

Devon Energy (NYSE:DVN) is also throttling back on completions, but would not disclose the number of wells in this status, saying only that it was "a lot." The deferrals and other voluntary curtailments of marginal production will take 15-21 billion cubic feet of total production off the market by the end of 2009.

There are many implications of these uncompleted wells, some beneficial and some not so great. Production growth for most exploration and production companies would be much higher if we were in a "normal" natural gas price environment and the industry was not holding off on completions. I put normal in quotes on purpose because maybe sub $4 per Mcf natural gas prices are normal, and the industry hasn't come to terms with it yet.

This avalanche of completions is good news for the pressure pumpers including BJ Services (NYSE:BJS), Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB). These three companies are the top three oil service companies who provide the hydraulic fracturing services that are crucial in the shale plays in North America.

A wall of natural gas is waiting to enter the market as many exploration and production companies put completions on hold in an attempt to both balance the market and protect the future value of its wells. A new up cycle in natural gas may be aborted when these wells start to enter the market. (To learn more, check out The Industry Handbook: The Oil Services Industry.)

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