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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Natural gas Producers Focus Shifting to Wet Gas

The divergence between oil and gas prices in Canada and the U.S. has reached epic proportions. Currently the oil-to-gas price ratio sits around 15. Up considerably from the historic average of 7.

Oil is simply a lot more valuable than gas in today's market. And that's changing the dynamics of oil and gas play development across the continent.

To be sure, gas plays are still getting drilled. But focus is shifting to "wet gas" that contains a significant amount of natural gas liquids.

These liquids usually sell at prices close to (or even above) the prevailing oil price. They are a significant "sweetener" for gas plays during the current period of low natgas prices.

Plays that come with high liquids today show some of the best economics in the world. One of the leading locales is the Eagle Ford shale of southeast Texas.

Gas wells in the Eagle Ford can produce hundreds of daily barrels of liquids. Which has given the play a leg-up on most others. In fact, many analyses of North American gas plays now show the Eagle Ford as having the lowest break-even gas price on the continent. By some estimates, these wells yield positive returns on investment even below $4 per mcf.

Even within the Eagle Ford, the shift to liquids has been clear. The chart below is from DI Energy Strategy Partners, who produce an excellent blog about the Eagle Ford (and a host of other unconventional plays). DI is partnered with Drillinginfo, one of the premier services for collecting and analyzing American exploration and production data. They know these plays.

Well Production

The chart shows production rates for wells drilled during each of the four quarters in 2009. The top chart blends liquids and gas production, using the traditional 6-to-1 gas-to-liquids ratio. Initial production rates improved dramatically in the fourth quarter (light green line), to nearly 4.5 million cubic feet gas equivalent per day.

Probably due to improved understanding of the play.

But the lower chart tells an even more interesting story. Converting liquids to gas using the current 15-to-1 ratio, initial production rates for Q4 jump even more, to over 5.5 million cubic feet equivalent per day.

As the chart's annotation explains, there was a notable shift in the latter part of 2009 from dry gas to liquids-rich gas in the Eagle Ford. Because of the high liquids content, production rates get higher (and wells more valuable) as the gas-to-liquids conversion rate increases.

Effectively, drilling high-liquids wells has allowed Eagle Ford producers to bump up the gas-equivalent production rates of their wells. A big part of the reason the play is showing superior economics right now.

As long as the current divergence between oil and gas prices continues, liquids-rich plays are going to be the hot topic for gas producers.

By. Dave Forest of Notela Resources

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