Shell, Southwestern Say Low Prices May Slow Gas Output Expansion

Royal Dutch Shell Plc (RDSA), Europe’s largest oil company, and U.S. natural-gas producers said low prices may slow an expansion in North American (PAL) onshore shale production.

Shell will keep spending “on the lower end” of last year’s $3 billion to $5 billion range if market conditions don’t improve, Marvin Odum, president of the company’s North American operations, said in an interview yesterday.

“It wasn’t so long ago that gas prices were still at a level where everybody was drilling almost as fast as you could reasonably make it happen,” said Odum, who was attending CERAWeek, a Houston conference held by IHS Cambridge Energy Research Associates. Now companies are starting to react “to where the prices are,” he said.

Surging output due to drilling advances in U.S. shale formations and a mild winter have pushed gas prices to a 10-year low, according to data compiled by Bloomberg. U.S. gas production climbed 6.5 percent to a record 28.6 trillion cubic feet in 2011, according to Energy Department data. Some of the largest gas producers in the U.S., including Chesapeake Energy Corp. (CHK), have announced plans to curtail gas production in response to low prices.

“We need to learn how to live in a $2 or $3 price environment,” Southwestern Energy Co. (SWN) Chief Executive Officer Steven Mueller said at the CERA conference.

If gas drops to $1.50 per million British thermal units, “it’s impossible to drill dry gas,” Mueller said.

Southwestern is the largest producer in Arkansas’ Fayetteville Shale field.

Writing Down Assets

Gas for February delivery fell 5.4 cents, or 2.3 percent, to $2.302 per million British thermal units on the New York Mercantile Exchange yesterday, the lowest settlement price since Feb. 15, 2002. U.S. inventories were 45 percent above the five- year average for the week ended Feb. 24, the biggest gap since June 2006.

Some producers may be forced to write down the value of their assets by the middle of the year if gas prices stay low, Mueller said.

QEP Resources Inc. (QEP), a Denver-based producer, is cutting spending in the Haynesville Shale and soon expects to stop drilling at the Louisiana field, CEO Charles Stanley said in an interview at CERA.

The Haynesville formation, in Louisiana and Texas, is the “biggest culprit” to the oversupply of gas, he said.

Peter Voser, CEO of The Hague-based Shell, said gas prices may climb to a low end of $4 to $6 in a few years.

Exporting Natural Gas

With prices for the heating fuel at its current lows, Shell wants to wrest more value from gas by using it to produce chemicals, other fuels or turning it into liquid form for potential export, said Odum.

Exports of liquefied natural gas (UNG) from the U.S. are possible as customers seek supplies, said Rob Bryngelson, CEO at Excelerate Energy LP, a company based in The Woodlands, Texas, which provides services for liquefied natural-gas operations. Excelerate is considering building a liquefaction facility in North America, which chills gas into liquid, by 2016 or 2017, he said.

“You’re going to see U.S. gas prices go up,” Bryngelson said. “They have to. That’s just simple supply and demand. There’s so much supply, but it’s outstripping demand to the point where it’s suppressing prices below a sustainable level.”

To contact the reporters on this story: Edward Klump in Houston at eklump@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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