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Will cheaper pipeline fees put rigs back in the Barnett Shale — and jobs back in North Texas?

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Is a cheaper rate for piping natural gas all it will take to put rigs back in the Barnett Shale – and bring oilfield jobs back to North Texas?

That was the claim offered by Oklahoma-based Williams Partners last week. Some analysts are skeptical.

The pipeline company announced a new pricing formula for the corporation that just picked up massive Barnett assets that had been owned by Chesapeake Energy. Instead of getting a guarantee up front, whether gas went in the pipe or not, Williams will get a fee based on what is actually piped and the spot price for gas set.

Here’s the claim made in the Williams news release:

“…[T]he conditional gas gathering agreement will bring drilling back to the Barnett Shale and return wells determined to be uneconomic under earlier gathering rates to production.”

That would be quite a change. According to the Baker Hughes rig count, 64 rigs were drilling for natural gas in the Barnett in May 2011. Even that was down from 2008, when almost 200 rigs were drilling in the Barnett. As of Friday, Baker Hughes counted zero rigs.

Chesapeake announced last week it would all but give away its Barnett assets: 215,000 net developed and undeveloped acres and approximately 2,800 operated wells. The new owner is Saddle Barnett Resources, a Dallas-based company backed by an energy equity company, First Reserve.

The deal gives Chesapeake $400 million, but Chesapeake is paying Williams $334 million to get out of future commitments. More important, it eliminates $1.9 billion in those commitments that Chesapeake had made on production that had become a money-loser.

Williams, in turn, announced the new fee setup.

Is that enough to bring rigs back to the acreage near Fort Worth? It’s not as if there’s any doubt about whether there’s gas to be found. The Energy Information Administration estimates the Barnett Shale holds 53 trillion cubic feet of natural gas. And the Barnett is where the fracking revolution was born, coaxing out gas and oil from formations that had been considered too difficult and expensive to successfully drill.

In last week’s announcement, Williams said its new customer guaranteed spending $40 million a year on drilling through 2018 plus an unspecified amount on well connections and other projects.

Asked for clarification, a Williams spokesman cited the news release.

But here’s the problem, analysts say: The Barnett was a victim of its own success. Fracking moved to other shale fields. And some of those fields are producing five to 10 times as much gas per well as the average wells in the Barnett. Which means the reduced cost of transportation — those pipeline fees — is not likely to be enough to make the Barnett competitive again.

At least not at today’s prices. Back in May 2011, the Henry Hub price was as high as $4.50 per million BTUs. In 2008, the price topped $12. This month, the price was as low as $2.79.

And unlike some other regions that produce crude oil and other liquids that help push revenues along with natural gas, the Barnett’s gas is mostly dry.

“In order to see any meaningful increase in drilling, gas prices would have to rise above $4,” said Taylor Cavey, an energy analyst with Platts Analytics.

The Barnett does have some advantages, said Teri Viswanath, managing director for natural gas at Pira Energy Corp in New York. Geography, for instance. Demand for natural gas is rising in the region, particularly to fuel electrical generation. And the Barnett is relatively close to chemical plants and LNG export hubs from along the Gulf of Mexico, she said.

Also, newer drilling in the Barnett could benefit from rapid improvements in technology. Other oil fields have demonstrated significantly better production using the latest techniques in fracking and horizontal drilling.

Even if drillers in the Barnett can show similar gains, however, they’re already running behind the competition in the Utica and the Marcellus, she said.

“Those other basins are not standing pat,” she said. “It’s challenging.”

Analysts need to pay some attention to Williams’ claims because the company has longstanding credibility, Viswanath said.

“This is not a small operator. This is a big player,” she said.

At some point, cutting the cost of transporting gas will help push the total cost of production low enough to bring the rigs back to the Barnett, said Ed Ireland, Executive Director of the Barnett Shale Energy Education Council. But that point is not now, he said.

“There have been significant increases in drilling efficiencies that lower drilling costs,” he said. “But there is no question that natural gas prices need to be higher than they are currently to bring about a recovery in drilling for natural gas


TAGS: Oil, Gas, Shale, Drilling


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