Natgas drilling rig count hits new 10-year low

NEW YORK Fri Apr 27, 2012 6:22pm EDT

Oil rigs are seen in Midland, Texas May 9, 2008. REUTERS/Jessica Rinaldi

Oil rigs are seen in Midland, Texas May 9, 2008.

Credit: Reuters/Jessica Rinaldi

NEW YORK (Reuters) - The number of rigs drilling for natural gas in the United States fell this week to the lowest level in 10 years as historically low prices continued to force producers to slow dry gas operations.

The gas-directed rig count has dropped in 14 of the last 16 weeks, sliding 18 this week to 613, matching the number of rigs drilling for dry gas back in April 2002, data from Houston-based oil services firm Baker Hughes showed on Friday.

The count climbed last week for only the third time this year.

One of the mildest winters on record sharply cut gas demand and built up a huge surplus inventory that has steadily pressured gas prices this year.

Front-month gas futures hit a 10-year low of $1.902 per mmBtu late last week, a level that crimped producer profits and made most dry gas drilling uneconomic.

While low gas prices have helped homeowners and businesses and attracted more demand from utilities and industry, they have been bad news for some dry gas producers that have been forced to sell gas at below cost.

The nearly steady drop in dry gas drilling over the last six months -- the gas rig count is down 35 percent since peaking at 936 in October -- has raised expectations that producers were finally getting serious about stemming the flood of record gas supplies. (Graphic: r.reuters.com/dyb62s)

But rising output from shale has kept production growing.

Horizontal rigs, the type most often used to extract oil or gas from shale, lost ground for the third time in four weeks, shedding 16 to 1,139. The horizontal count hit an all-time high of 1,185 in late January.

OIL DRILLING FALLS FROM NEW HIGH

The oil-focused rig count fell this week from last week's 25-year high, down 9 to 1,328 rigs, Baker Hughes data showed.

Still, there were 43 percent more rigs drilling for oil in the United States this week, compared to a year earlier, when only 926 oil rigs were operational.

Energy companies have shifted spending away from dry gas to more lucrative hydrocarbons like oil and liquids-rich gas.

GAS PRICES

Front-month natural gas futures on the New York Mercantile Exchange, which were up 3.6 cents at $2.16 per mmBtu just before the Baker Hughes data was released at 1 p.m. EDT (1700 GMT), edged up to an intraday high of $2.183 after the report.

Talk of more supply cuts by producers has helped firm cash and futures prices recently.

Royal Dutch Shell on Thursday said it would be switching the bulk of its gas drilling program in the United States toward the production of "wet" natural gas and away from "dry" gas.

Shell's gas production in 2012 is expected to be lower year-on-year but should climb again in 2013.

Encana (ECA.TO), Canada's largest gas producer, on Wednesday also raised expectations about more gas supply cuts.

Chesapeake and Conoco have previously announced plans to reduce dry gas production this year.

Gas prices are down about 28 percent so far in 2012 and further downside is expected without more cuts in supply.

The share of horizontal rigs drilling for dry gas is down to about 38 percent from 78 percent just two years ago, but the drop has not been reflected in pipeline flows, which are still estimated to be at or near record highs.

Analysts note that the producer focus on more profitable oil and gas liquids plays still produces plenty of associated gas that ends up in the market after processing.

The U.S. Energy Information Administration expects marketed gas production in 2012 to climb by 3 billion cubic feet per day, or 4.5 percent, to a record 69.22 bcfd.

Most analysts do not expect any major slowdown in gas output until later this year.

(Reporting By Joe Silha; Editing by Bob Burgdorfer)

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