NEW RIG NUMBERS GROW DESPITE LOW NATURAL GAS PRICES!
BY JD Dodson
Natural gas prices have remained soft as the one year strip has hovered around $5 per mmBTU for most of 2010. The economy has contributed to keeping demand in check, helping prices stay low.
On the supply side however, we have seen a curious uptick in drilling. In comparison to a year ago, we have seen a growth of over 275 new natural gas rigs. So, why would a natural gas producer bring on new rigs when prices have stayed fairly low?
Technological Advances
The start of the new production frenzy has contributed to advances in technology. The frenzy started in 2007 when drilling was focused in Texas. Deep below the Fort Worth, Texas, area is a large reserve of natural gas called the “Barnett Shale.” Estimates put the reserve at over 30 Trillion cubic feet. Although producers understood the potential size of the reserves, modern drilling techniques, low gas prices and political roadblocks did not allow for a feasible solution to access the gas since shale and rock are extremely hard to penetrate.
The first factor was the advancement of Hydraulic Fracturing techniques. Although this technique was developed in the 1940’s, it has gone through many stages of improvement to allow for a more economic way of accessing deep pockets of gas.
Moreover, the average well depth in the Barnett Shale is 7,200 feet. The fracing technique centers on creating tiny fissures or fractures in the rock. This is done by pumping water, sand and additives under extremely high pressure into the rock formation.see RIGS Page 2
NATURAL GAS RIGS CONTINUE TO GROW DESPITE LOW PRICES
Once the fissures are created, the sand keeps the small pockets propped open to allow the natural gas to seep up through the pores.
Also, horizontal drilling has allowed drilling companies to access gas in well- populated areas. Traditional wells are straight down, whereby horizontal wells turn up to 90 degrees. The horizontal part of the well can travel several thousand feet to access critical pockets.
Economics
Besides the technological advances, the economics of drilling proved to be a motivating factor. For most of the 1990’s, the price of natural gas averaged $2 to $3 per mmBTU.
This changed dramatically over the next decade as prices topped out around $13 in both 05’ and in 08.’ At these prices, natural gas producers were motivated to access proven reserves.
In 2005, a revision was made to the Energy Policy Act, whereby drillers did not have to divulge the additives used in the fracturing process. This allowed producers to avoid red tape and the expense of government oversight.
Lastly, and maybe the most important consideration is the way production companies are valued by Wall Street. Production companies’ decision to drill has to do with calculating the Net Present Value of the well and the simple payback on the initial investment.
When a company calculates hypothetical cash flow discounts to come up with the net present value of the cash, typical ratios of six times the initial investment would lead to drilling.
This ratio has been ignored over the last couple of years as producers are going on break-even propositions.
Why? Wall Street values companies off the reserves; thus, production companies just want to expand their reserve base to become a stock dandy. The many drillers who were left on the sideline during the Barnett Shale land grab are not being left out in leasing around the other shale plays. (Reference map above).
Current Shale Plays
The current economics of drilling do not add up. However, there could be more help on the way as Congress proposes a bill that would increase demand of natural gas by funding natural gas transportation fleets.
On the end of the equation, the natural gas industry is under environmental scrutiny as some claim water sources are being tainted by the additives used in drilling activities. This could lead to additional costs to the industry.
Regardless, natural gas is going to be a big part of our growth needs because it is a fairly clean burning fossil fuel that is available domestically.
CELEBRATING EIGHT YEARS IN BUSINESS!
June 2010 marked RPM’s 8th year in the energy business. In those eight years, the company has established itself as a trusted energy advisor for leading companies across the U.S. including Russell Stover, Amazon-acquired Woot!, StarPoint Properties, JC Penney, AT&T, and many more.
RPM initially offered Energy Procurement and Power Factor Correction services, but the team found that they could better serve their customers by expanding their business, which meant growing the team, manpower and locations of operation.
What started out as a two-person company 8 years ago in Texas is now a thriving business with a nationwide network operating across the U.S.
ERCOT SUCCESSFULLY COMPLETES TEST RUN OF NODAL MARKET
In 2003, ERCOT was given a mandate by the PUCT to develop a Nodal Market design for the Texas grid. ERCOT is the independent system operator that operates the electric grid for 75 percent of Texas.
ERCOT has set the date of December 1, 2010, for the Nodal Market system to come into affect.
ERCOT currently runs on a Zonal Market design, which separates the grid into four zones: Houston, North, West and South.
Once Nodal operation begins, the grid will be divided into more than 4,000 nodes. One of the main objectives of switching to a Nodal market is to have a more direct assignment of local congestion costs. Customers congestion cost will be now be based on their proximity to the generation. For example, a customer located near a power plant will have lower congestion costs than one located farther away. It is hoped that this will lead to locating additional generation in the areas that need it.
On Thursday, June 17, ERCOT successfully completed a test run of the Nodal Market. On this day the power grid was managed using the Nodal system that will be in place December 1.
The Nodal team took control of the grid at 10 a.m. and returned control to the Zonal team at 5:50 p.m. ERCOT’s Chief Operating Officer, Mike Cleary stated in an ERCOT press release that minor issues were found, but they believe the test was successful. The next significant step will occur in September and will be a 168-hour test.
