Natgas prices must drop below $3 to curb production

Monday, October 04, 2010

Natural gas futures must fall well below $3 before producers begin to curb production, according to a Reuters poll, lower than the break-even price for drilling, reflecting a market still in flux from the advent of shale gas.

Henry Hub natural gas futures prices stuck below $4 per million British thermal units (mmBtu) for the past five weeks, the longest stretch below that mark in a year. Traders are searching for evidence that marginal drillers may finally begin to idle rigs.

But according to a Reuters poll, the conventional wisdom that a price of $3.50 to $4.00 gas would curb production has grown outdated since 2009, when prices collapsed in September, to an average of $3.46.

Now, prices would need to drop to a sustained level of $2.73 per mmBtu before companies are likely to stop drilling new wells, according to the average of 14 analysts surveyed by Reuters. The highest estimate was $3.50; the lowest was $1.75.

"Break-even costs for drilling in the Haynesville and Marcellus, two of the most prolific shale plays located in Louisiana and Pennsylvania are below $4/mmBtu," said Tom Sherman, analyst with Bentek Energy in Evergreen, Colo., in line with current prices.

"Gas prices below $3 for a long period would certainly curb drilling programs for dry gas but costs for liquids-rich gas in plays like the Eagle Ford and Granite Wash [shales] are lower than $3," he adds.

"With [sustained] $3 gas you'd see a lot of rigs come off," Sherman said. "Logically and rationally with most break-evens above the $3.00 mark and long-term $3.00 gas, why would a producer drill?"

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