Unconventional Gas to Lead the Way as Gulf Output Falls

DENVER Aug 16, 2006 (Dow Jones Newswires)

Gas trapped between sand particles and under hard rock will be the next place to drill for the commodity while offshore Gulf of Mexico production dwindles, analysts and gas executives said Tuesday at an oil and gas conference in Denver.

Natural gas is scarce in "conventional" gas wells and companies who want to maintain an edge in gas production will have to fracture shale rock to extract the gas that lies beneath. Gas stranded between tight sands in Wyoming will also be taken out and brought to the market, executives said.

"Unconventional gas will eventually make up way over half the reserve base," said Mark Urness, director of oil services research with Calyon Securities in New York, speaking on the sidelines of The 11th Oil and Gas Conference hosted by Enercom in Denver Tuesday.

Gas prices would have to remain around $7.00 per million British thermal units to financially support unconventional drilling programs, Urness said.

September gas futures on the New York Mercantile Exchange settled lower Tuesday for the fourth day in a row at $6.861/MMBtu.

EnCana Corp. (ECA) is betting on at least a $7.00 price next year and has hedged 97% of its bets on a $7.30 per million cubic foot floor price for its 2006 production, said Jeff Wojahn, president of EnCana USA during an interview Tuesday. The company has developed some of the technology used to drill for gas under shale rock where the rock has to be broken to reach gas deposits underneath.

EnCana has also joined with The Exploration Company (TXCO), a smaller oil and gas exploration and production company based in San Antonio, TX, to drill for gas in the Maverick Basin, a shale play in southwest Texas, said Jim Sigmon, president and CEO of The Exploration Company.

However, Sigmon said this isn't the last of the land grab to explore for and develop natural gas. As companies develop technology, they will recast an eye on land once thought void of gas.

"What you're seeing is what the latest technology can do," Sigmon said. "You don't know the impact of technological developments."

Offshore Gulf of Mexico drilling is dwindling since daily rig rates have doubled and insurance rates from hurricane damage last year have tripled in many cases, analysts said. At least one company which continues to drill there said activity may pick up again early next year depending on the cost of daily rig rates and insurance premiums.

"The one good thing about what happened last year is that it forced insurance companies to draw up policies that protect specific items only," said Al Reese, chief financial officer of ATP Oil and Gas (ATPG) in Houston. "They said to us, 'What exactly are you trying to cover?' And we said, 'Yes we need to insure this risk, no we don't need to insure this one.'"

Reese also said after last year's destructive storms, his insurance rates only doubled. In some cases insurance rates have quadrupled, analysts said.

In the meantime, Wall Street is currently undervaluing energy stocks, Urness said. "The energy cycle is intact, despite what investors or Wall Street may do," he said. "This is a normal seasonal pattern for stocks to go down."

The current energy boom will last at least five to seven years, he added.

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