Ed Ireland: Barnett Shale: Honeymoon over but marriage still solid

Stories abound lately: Barnett Shale companies are taking leases off the table and announcing pullbacks. So, what is happening in the Barnett Shale?

The short answer is that we are having a reality check. Natural gas prices rose rapidly compared with historical trends. The higher prices helped to justify fierce competition among companies bidding for mineral leases, resulting in unsustainably high bonus payments.

The combination of falling natural gas prices and a credit crunch have forced companies to reassess their operations.

Natural gas prices have always been volatile. Seasonal patterns because of the increased demand for natural gas for winter heating influence prices. The prices also fluctuate because of supply and demand interaction and storage levels.

Also, natural gas prices are influenced by the price of crude oil, so when the price of crude shot up to almost $150 per barrel during the summer, natural gas prices increased to almost $15 per mcf. When crude prices dropped, so did natural gas. With crude now under $70 per barrel, natural gas prices declined to less than $7 per Mcf.

Granted, that is a 50 percent drop in just a few months, but actually prices are now just about where they were a year ago. They are now at a more sustainable level. Nevertheless, the higher natural gas prices supported the higher lease bonus payments. So when natural gas prices retreated, it was no surprise that lease bonus payments followed.

The other problem that hit at the same time as falling natural gas prices was the turmoil in the credit markets. Debt is a necessary and legitimate part of corporate finance. But as the turmoil in the credit markets made credit much tighter, most companies had to reassess their debt ratios and adjust their operations accordingly. The extent to which this affects operations varies from company to company. Companies with heavier debt loads are more affected by the credit turmoil.

So, what can we expect in the near term?

Some companies operating in the Barnett Shale have said they are slowing operations to some extent while others say they are sticking to their 2009 budgets.

However, all companies have said they are no longer offering leases at previously high bonuses. Some have said that any new leases offered in the near term will be in the range of $5,000 per acre. Only time will tell if competition among leasing companies pushes bonuses anywhere near as high as in the past.

Companies may also start being very selective about the locations in which they operate. Municipalities that have imposed very restrictive and operationally expensive drilling ordinances may find that the squeezed profit margins push drilling companies to other parts of the Barnett Shale.

Our honeymoon in the Barnett Shale may be over, but the marriage is still solid.

While news reports speculate on the overall impact of this industry stabilization, we must keep in mind that a lot of natural gas remains trapped in the Barnett Shale.

Operators have large inventories of leases for which they have paid handsomely, and these companies must continue to drill and produce wells to receive a return on their investment.

It is fair to expect that drilling activity may slow in the near term while companies re-prioritize their activities, but nothing has altered the long-term outlook. The Barnett Shale continues to be a leading engine in the region’s economy.

Ed Ireland is the executive

director of the Barnett Shale Energy Education Council, a consortium of 11 of the leading energy companies operating in the Barnett Shale. For more

information regarding pipelines and links to other sites visit the BSEEC Web site www.bseec.org.