Natural Gas Producers Squeezed by High Costs and Low Prices

It's hard to believe, but just ten years ago $2/mcf was a pretty good natural gas price.

North American gas sold for around that level throughout most of the 1980s and 1990s. And plenty of producers made money during those times.

The reason was costs. Back in those days, it cost a lot less to drill and service a well, build pipelines, and maintain a field.

Here's some example data from the Petroleum Services Association of Canada. In 1981, a 2,000 meter gas well in central Alberta cost $450,000 to drill and complete. By 2005, the same well more than doubled in cost to over $1 million.

Obviously, with higher costs producers need a better gas price in order to make money. And up until 2008, they were getting the prices they needed to turn a profit even in a high-cost services environment.

But since then, things have changed. Prices have fallen back. Not quite to $2, but sometimes close.

Normally, low prices should have an effect on costs. With profits falling, less companies would drill. And with reduced services demand, drilling costs would drop. Possibly to the point where producers could once again make money at lower gas prices, like they did in the eighties and nineties.

But that's not happening these days. Recent data from the U.S. Bureau of Labor Statistics show that in October, U.S. drilling costs hit their highest level since April 2009.

Services prices did come down about 20% in the immediate wake of the financial crisis. But in 2010, they have been rising again. And the industry is still at very elevated cost levels compared to the beginning of the decade.

Part of the reason is oil prices have remained high. Leading to increased rig demand for oil-well drilling. Another reason is gas producers are still drilling in order to hold land in U.S. shale plays. There are anecdotal reports that frac costs in certain plays have tripled over the last few months.

High services costs and low gas prices are putting the squeeze on producers. Something has to give sooner or later.

By. Dave Forest of Notela Resources