Devon CEO sees gas rebalance in 2010

By Anna Driver

HOUSTON (Reuters) - The chief executive of Devon Energy Corp (DVN.N) said he expected the U.S. natural gas market to rebalance in 2010 when a steep decline in drilling meets demand muted by the recession.

Natural gas prices will remain challenged from now until November and perhaps beyond that date, but a recovery is likely next year, Larry Nichols, Devon's CEO, said on Thursday at the Reuters Global Energy Summit in Houston.

"Looking forward to the next year, you can begin to get optimistic as you can for 2010 as you can be pessimistic for 2009, simply because of that remarkable drop in natural gas drilling," Nichols said.

In response to a steep decline in prices, Devon's U.S. rig count has fallen to about 30 from 120 last summer, Nichols said.

Natural gas futures traded around $3.80 per million British thermal units on Thursday, well off the market peak around $13 per million British thermal units seen in July.

But those low natural gas prices that prompted Devon to rein in drilling are also boosting the profitability of its Jackfish Canadian oil sands operations.

"The profitability of Jackfish I is quite good today because we're buying natural gas a lot cheaper than we historically have relative to the price of oil," Nichols said.

At Jackfish, Devon employs steam-assisted gravity drainage technology. It buys gas to generate the steam it pumps into the ground, which loosens up the extra-heavy crude so it can be pumped to the surface in wells.

Nichols said the first phase of the company's Jackfish oil sands project in Alberta was on track to reach capacity production of 35,000 barrels a day later this year.

Jackfish, located south of the oil sands hub of Fort McMurray, Alberta, is pumping about 30,000 barrels a day of tar-like bitumen, Nichols said.

Devon, which has a greater emphasis on natural gas production, believes the recent gains in crude oil -- which has more than doubled since early this year -- are unsupported by market fundamentals.

"It does kind of feel like the market is getting ahead of itself," the executive said. "The demand for oil has not increased at all."

Devon is also seeing good interest in the deepwater Gulf of Mexico acreage it has put on the market as it adjusts its asset base.

"A lot of people have called and expressed interest," Nichols said, but cautioned that the sale process was still in its very early stages.

Shares of Devon closed at $65.45 on the New York Stock Exchange. The stock is down 0.4 percent this year, compared with a 19 percent gain in the American Stock Exchange index of natural gas companies .XNG.