Natural Gas Production To Continue To Grow Until Late 2012, According To Barclays Capital

Although the number of natural gas-directed rigs has fallen by 118 from last year’s peak in August, natural gas production will continue to grow at an incremental pace according to Barclays Capital.

In its Natural Gas Weekly Kaleidoscope for the week of July 5, the investment bank stated that it does not anticipate a drop in production until Q4 2012 at the current level of activity.

“Currently, the rig count is moving mostly sideways with a slight downward bias as rigs are redirected toward oil drilling. Gas-directed drilling activity peaked last August near 1,000 rigs and currently stands at 874. We estimate that 825 rigs approximately keep production flat – that is, growth from new drilling offsets declines from existing wells. Still, production shows few signs of turning lower -- indeed, April EIA-914 data showed another sequential monthly increase,” according to the report.

The reason for this continued gain in production, despite a lower rig count, is because many of these rigs are being directed to horizontal drilling in shale plays with greater efficiencies than conventional sources.

“Operators are producing more gas per rig; in other words, increasing rig efficiency through a higher horizontal rig-count share and continuing to drill unconventional shale with ever more intensity, longer laterals and more fracturing stages,” the report said.

While it may appear that drilling activity is down, Baker Hughes estimates that the total rig count for oil- and gas-directed horizontal drilling is 1,073. This large number points to the fact that producers are continuing to focus on unconventional shale plays with the Eagle Ford, Granite Wash and Marcellus experiencing the most activity due to their strong economics.

“We believe natural gas drilling activity remains too high, supported by incentives to grow production, wide-open access to capital markets, adequate hedging levels, liquids-rich gas and joint-venture agreements. Oil prospects have and should continue to pressure the gas rig count lower, but limitations in available oil targets mean that a large-scale shift in the near term is unlikely,” the report said.