Gas Crisis Forum: Is It Real, or Is It Hype?
of 2002-2003 and the more pervasive liquidity crunch of all gas market participants played a little-noticed role in determining storage inventory levels. Merchant gas traders and other distressed market participants held large storage inventories to meet their supply obligations. Sales of storage inventories, purchased at around $3.00, were often the only quick source of cash over the winter in a $6.00 market, providing critical liquidity and operating profit to corporate parents but critically exacerbating inventory depletion. Recent record fill rates would suggest-but not prove-that the working industry hypothesis on inadequate wellhead deliverability was simplistic and overstated.
Deliverability Declines in New Gas Wells
For the past 20-odd years since de facto wellhead price deregulation, gas exploration and production (E&P) has been a sucker's game in North America. Industry-average returns on investment have hovered in the same range as passbook savings accounts, with periodic price boomlets to bolster those returns and to rebuild confidence and enthusiasm to continue the hunt.
Cumulative improvements in seismic data processing and interpretation, hydraulic fracturing of gas-bearing but impermeable rock, drill bit directional control (permitting, among other things, horizontal drilling through gas-bearing strata from a vertical wellbore) and other technological advances have allowed E&P companies to not only chase hydrocarbon "elephants" in extreme environments but also to target and profitably extract gas from previously uneconomic formations onshore and smaller geological structures on the shallow continental shelf of the Gulf of Mexico. Relaxed state regulations on well spacing allowed in-fill drilling in older gas fields to recover more gas-in-place. These techniques could be applied relatively quickly to a company's producing properties and previously evaluated onshore and offshore acreage under a mineral lease.
Because such wells are drilled in and around producing gas fields with established midstream infrastructure, 4 the time from capital authorization to marketable production can be three to six months, although systematic exploitation of a given technique in geographically extensive gas-bearing formations can take many years.
It is these prospects that are first brought on-stream as a result of a multi-month price spike, such as the 2000-2001 gas price excursion during the California power crisis. As Henry Hub gas prices rose from below $3.00 in the spring of 2000 to a peak of over $9.00 in January 2001, the drilling rig count exhibited its typical lagged response. The U.S. gas well rig count rose from 600 rigs in the spring of 2000 to 880 rigs in January 2001 and only crested at over 1,000 rigs later that summer, six months after prices started to tank, reaching about $2.25 by September and languishing below $3.00 through the warm winter of 2001-2002. 5
The new crop of gas wells resulting from this drilling boomlet was predominantly composed of field extensions and other low-risk/low-reward targets. Industry analysts who claim that the rapid decline in average wellhead deliverability from wells of this vintage is indicative of a major decline in North American prospect quality miss the point: Most of these wells were drilled on familiar territory to capture a short-term opportunity. Frontier exploration for large and expensive prospects continued apace, but represented