US Energy Cos Flee Natural Gas for Unconventional Oil Fields -Analyst

HOUSTON (Dow Jones Newswires), Jan. 28, 2011

U.S. energy producers are making a massive investment shift from natural-gas production to unconventional oil drilling as natural-gas prices stagnate, said Sylvia Barnes, managing director and head of banking at investment firm Madison Williams and Co.

With natural-gas prices remaining stuck at about $4 per million British thermal unit, more energy companies are taking the advanced drilling technologies that allowed them to unlock previously unattainable natural gas and moving to less developed, but potentially more profitable, unconventional oil fields.

The widening spread between oil and natural-gas prices is driving the investment shift, Barnes said. The oil-to-gas price ratio, which was traditionally 6-to-1, is expected to reach 18-to-1 by November.

The move away from natural gas is shown by energy company capital-expenditure decisions, Barnes said. For example, Devon said 90% of its capital expenditures in 2011 will be to increase production of oil and natural-gas liquids. Chesapeake said it will increase its oil and liquids production from its current rate of 8%, or 55,000 barrels a day, to 20% by 2015.

The clearest indication of energy producers' renewed focus on oil and liquids comes from the change in drilling-rig numbers, Barnes said. During the past three years, the number of natural-gas production rigs in the U.S. has fallen by 53% since January 2008, while the number of rigs drilling for oil has grown by 47%.

"We are seeing capital shift to oil- and liquids-rich opportunities, and cash flow is being generated by oil- and liquids-rich production," Barnes said at the Argus Americas Crude Summit 2011 in Houston.

Drilling activity has already grown in the Bakken field in North Dakota and the Eagle Ford shale in south Texas. But as those fields become more crowded--Bakken acreage that leased for $170 an acre in February 2009 averaged $3,000 an acre in 2010--companies are increasingly looking to exploit similar oil and natural-gas liquids fields that have so far remained untapped, Barnes said.

Prime candidates for development are the Granite Wash and Niobrara shales, both in the mid-continent region.

"Austin Chalk is the next Eagle Ford," Barnes said, referring to a relatively undeveloped oil field sprawling through south Texas.

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