February 10, 2012 / 6:50 PM / 8 years ago

UPDATE 2-US natgas rigs at 28-month low, prices squeeze profits

* Natural gas rig count hits lowest since Oct. 2009

* Gas-directed rig count slips for fifth week

* Horizontal rig count loses ground for second week

* Oil rigs up 18 to new record high

By Joe Silha

NEW YORK, Feb 10 (Reuters) - The number of rigs drilling for natural gas in the United States fell last week to the lowest level in 28 months as producers continued a rapid cut in activity in the face of ultra-low prices.

The gas rig count fell for the fifth straight week, by 25 to 720, completing the biggest two-week drop in three months, according to data from Houston-based oil services firm Baker Hughes on Friday.

Record-high supplies and weak demand during one of the mildest winters on record helped drive gas pries to 10-year lows two weeks ago, forcing companies to halt production at flowing wells and slow drilling in pure gas plays.

Several key players including Chesapeake Energy, the country’s No. 2 gas producer, have said they will shut-in some output or move rigs over to more lucrative oil or gas liquids prospects as gas fields become uneconomical.

The number of rigs focused on oil drilling shot up by 18 to 1,263, marking the fourth straight week of record highs, according to Baker Hughes data dating back to 1987.

In sharp contrast to gas, oil drilling in unconventional shale prospects such as the Bakken in North Dakota and Eagle Ford in South Texas has led to a sharp and continuous rise in the oil-focused rig count over the past three years.

The natural gas rig count, now at its lowest since October 2009, is down about 23 percent from the last year’s peak of 936 hit in October.

But traders said the planned gas cuts were no where near what would be needed to tighten an oversupplied gas market.

The recent rig slide to well below 800, which many analysts say is needed to slow record output, has reinforced talk that low gas prices, off about a third in the last three months, could finally be crimping producer profits.

Front-month natural gas futures on the New York Mercantile Exchange, which were near flat at $2.476 per million British thermal units just before the report was released at 1 p.m. EST (1800 GMT), showed little reaction to the data and ended at $2.477.

The near contract hit a 10-year low of $2.23 two weeks ago.

Gas prices have been weighed down for the past year by record high gas production, primarily from shale.

In response, producers have shifted spending from pure dry gas wells to more-profitable oil or gas-liquids prospects.

Horizontal rigs, the type most often used to extract oil or gas from shale, lost ground for a second week, dropping by three to 1,171, but the horizontal count remains near the all-time high of 1,185 hit two weeks ago.

The share of horizontal rigs drilling for dry gas has fallen sharply over the last two years due to much higher prices for oil and natural gas liquids (NGLs).

Horizontals labeled as gas dropped to just 47 percent of the total at the end of last year. That was down from 80 percent just two years prior.

But traders said any slowdown in gas production could take a lot more time, as oil and liquids-rich wells still produce plenty of associated gas which ends up in the market after processing.

The U.S. Energy Information Administration on Tuesday slightly raised its estimate for marketed gas production this year to a record high 67.64 bcfd, which would be the second straight annual record.


With gas production still running at all-time highs and inventories likely to end winter at a record high, most traders expect gas prices to remain on the defensive unless much colder weather arrives to kick up heating demand.

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

In addition, inventory withdrawals this winter are running nearly 480 bcf or about 33 percent below average, stirring concerns that the huge inventory surplus building compared with last year and the five-year average could turn out to be an even bigger problem for prices this year than record production.

Stocks remain more than 700 billion cubic feet, or about 33 percent, above both of those benchmarks.

If winter demand does not pick up soon, storage owners may have to dump gas before March 31 to meet minimum seasonal turnover requirements. That could drive prices back below the recent 10-year low.

A huge inventory cushion could also spell trouble for prices late in the summer stock building season if inventory owners run out of room to stockpile gas, forcing even more supply into a glutted market.

Rising output from shale gas has been the primary driver of increased gas production in the last few years, and most traders agree it will be difficult to tighten the loose gas market unless horizontal gas drilling slows sharply.

Without more production cuts or a stronger economic recovery to boost industrial demand, which accounts for about 30 percent of gas consumption, few traders expect much upside in gas prices in the near term.

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