Drillers dropping diesel for cheaper natural gas
HOUSTON (Reuters) - North American oil and gas companies are trying to take the sting out of low natural gas prices by using it instead of costlier diesel fuel to drive their drilling rigs.
Oilfield technology such as horizontal drilling and hydraulic fracturing have unlocked record supplies of natural gas in North America, pushing prices to a 10-year low and cutting profits. The oversupply has prompted gas producers to actively promote the fuel as a low-cost, cleaner burning means of fueling vehicles and other equipment.
Apache Corp (APA.N), the largest U.S. company focused solely on oil and gas exploration and production, is in the process of converting its first rig to run on power generated by liquefied natural gas (LNG). Canada's Encana Corp's (ECA.TO) already has 15 of its more than 40 rigs driven by gas, and plans to convert even more.
"What we need to do is increase the amount of natural gas demand in this country," Steve Farris, chief executive of Apache, said in a recent interview in New Orleans. "From an economic standpoint, it's a no brainer."
Two years worth of fuel savings can cover the cost of conversion, according to Encana.
U.S. natural gas producers including Chesapeake Energy Corp and Apache have long touted compressed natural gas as a fuel for truck and vehicle fleets. Now, more energy companies are looking to natural gas as a means of powering their drilling rigs.
"We've seen interest just kind of explode in the last six to eight months," said Ron Bertasi, chief executive officer of Prometheus Energy Group Inc, which provides LNG and services to energy companies to run drilling rigs.
So far Prometheus, owned by Cargill Inc backed-Black River Asset Management and Royal Dutch Shell's technology fund, service about 10 rigs that have been converted to run on natural gas. Inquiries are pouring in, Bertasi said.
Prometheus, which Bertasi said was first and is so far alone with its technology, has five customers and opened an office in Houston to grow its energy business.
By switching to natural gas, companies can reduce fuel bills and cut greenhouse gas emissions by up to 20 percent, according to Encana and Prometheus. Natural-gas generators are also less noisy than diesel engines.
Prometheus completed its first conversion only 18 months ago, so the business is not yet big enough to service all the shale basins in North America because the LNG is delivered by truck. The company so far has natural gas rigs in south Texas, Louisiana and Rocky Mountain states and is working to expand in other areas, Bertasi said.
And because it costs $1 million to $1.5 million to convert a rig, smaller exploration companies might find the process too costly in the current environment where natural gas prices are hurting profitability.
Chesapeake Energy Corp (CHK.N), the most active U.S. driller, is working to convert its rig fleet to run on diesel natural gas (DNG). Chesapeake aims to have more than 40 rigs running on DNG by the end of the year.
"To our knowledge, this will by far be the largest rig fleet utilizing natural gas," Kent Wilkinson, vice president of Chesapeake Natural Gas Ventures, said.
Anadarko Petroleum Corp (APC.N) is also looking into powering its drilling rigs with natural gas and is converting its vehicle fleet to run on gas, the company said.
There was an average of about 1,979 rigs drilling for oil and gas in March, according to data from Baker Hughes Inc.
EVERY BIT HELPS
U.S. natural gas supplies are so vast, converting drilling rigs to run on LNG is not likely to make a huge dent in supply or price.
Still, oil and gas companies are not sitting idly by.
Andrew Coleman, an oil and gas analyst with Raymond James in Houston said the cost savings are a big benefit of using natural gas to power drilling and wide-scale adoption of LNG in the oilfield may be meaningful.
"The biggest consumer of power in West Texas are the oil and gas companies," Coleman said. "To the extent that they can use natural gas from the well head, it will certainly help."
Encana operates its gas-fueled rigs in the Haynesville shale region of Louisiana and Horn River and Jean Marie regions of British Columbia, Encana spokeswoman Carol Howes said.
Some were fueled by field gas and others by trucked-in LNG.
Oilfield services companies are also eying the use of LNG to fuel their massive hydraulic fracturing fleets.
Halliburton Co (HAL.N) and Baker Hughes Inc (BHI.N) are owners of some of the largest fleets of trucks in the United States, and also leading providers of the hydraulic fracturing technology that has produced the North American gas glut.
Halliburton said it was "exploring all options" on how best to fuel its truck fleet. Baker has a small test program in Oklahoma where it has converted some of its light-duty vehicles to run on natural gas.
"As natural gas infrastructure develops, we will look at similar pilot programs in other areas," a Baker Hughes spokeswoman said.
(Reporting By Anna Driver; additional reporting by Jeff Jones and Scott Haggett in Calgary and Braden Reddall in San Francisco; Editing by Patricia Kranz and David Gregorio)
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