Another Interesting Read
Key Gas Indicators Suggest
Another Midstream Push
by Dr. Kent Moors
Dear Oil & Energy Investor,
Volatility is not just about the direction of prices, or the frequency of market ups or downs.
It also manifests itself in ways you simply won't see on page 1 of the Wall Street Journal.
Take, for example, an intriguing situation in today's natural gas sector...
Every week, Baker Hughes Inc. (NYSE: BHI) releases a rig count, tallying the total number of rigs used in the extraction of both oil and natural gas here in the United States.
And after analyzing the numbers for the week ending Friday, December 9, what I found was surprising.
The company's weekly rig count indicated a decline of drilling rigs for gas wells.
However, the same report indicated a rise in rigs being used in oil fields.
The gas-rig-usage figure declined by 36 for the week and stands 128 below the count for this week in 2010. In contrast, oil rigs increased 29 for the week and is up approximately 50% (1,132 versus 763) over the same week last year.
Now such a decline in gas well drilling, coming off similar weakening numbers over the past month, seems to indicate that the market has concerns over too much gas supply coming on line too quickly.
With prices in gas futures contracts deflating - despite colder winter months approaching - the balance of supplies in the system becomes an important consideration.
This market sentiment, of course, is a result of the rapid acceleration in unconventional gas drilling, especially in shale basins such as the Marcellus, Fayetteville, and Barnett. And the continued emphasis on shale continues to be observed in the rig figures.
Last week, horizontal rig usage (used for both gas and oil shale wells, as well as some conventional applications) declined by five. However, the figure was still up by more than 19% -- 185 more rigs in use - compared to the same period a year ago.
Turn That Rig (Back) On
The transferred emphasis to oil (and the recently higher market prices) has prompted an increasing reliance on recommissioning already depleted wells back into service. The number of workover rigs in use (meaning those employed to upgrade existing wells back into service) continues to climb.This would appear to indicate a decreasing reliance on new gas drillings, as well as a return to crude oil.
Well, that is not as simple a conclusion as it would seem.
For one thing, the number of gas wells drilled over the last 18 months has been nothing short of staggering. The volume already flowing into the network has been increasing available gas for each of the last two years.
In fact, there is so much extractable shale gas that the overall amount available to the market could increase by 25% per year over the next few years.
And that would impact prices.
The average shale gas well is providing most of its volume in the first 12 to 24 months. Therefore, as demand increases (and it is, especially in the usage of gas to power electricity generation), the number of operating wells will have to rise in the near future.
So, the decline in drilling appears to be a temporary thing.
However, something else is happening that has improved the profitability expectations for a specific segment of the gas sector...
A Boost to Midstream Operations
Again, the "midstream" is where services exist between the fields where the gas is produced (upstream) and the primary processing, treatment, distribution and sales (downstream).
And as demand (especially industrial) rises, a shortfall is developing rather quickly......
