January 2009 Vol. 236 No. 1

Projects

Barnett Shale Honeymoon Is Over But Marriage Still Solid

Stories abound lately about changes that are taking place in the Barnett Shale gas-producing region of north Texas. Barnett Shale companies are taking leases off the table and announcing pullbacks. So, what is happening?

The short answer is that companies are taking a breath and re-evaluating the pace of growth based on the current business environment.

Natural gas prices rose rapidly compared to historical trends, and higher prices fueled competition among companies bidding for mineral leases. The result was high bonus payments and rapid development. The combination of falling natural gas prices and a credit crunch is forcing producers and midstream companies to reassess the pace at which they can and want to grow in the Barnett Shale, but it hasn’t affected the Barnett Shale’s long-term viability or production potential.

Natural gas prices typically fluctuate as seasonal demand, storage levels and the price of crude oil changes. The recent spike in natural gas prices is largely attributed to record crude prices, and likewise, the current drop in natural gas prices, 50% in just a few months, is credited to falling crude prices. As natural gas prices decreased, so too did lease bonus payments. Today, natural gas prices are just about where they were a year ago.

At the same time, turmoil in the credit markets has made credit harder to secure. That tightening of credit is forcing companies to reassess their debt ratios and find alternative ways to fund expansion projects. The impact of the credit crunch varies from company to company. But in general, producers and midstream companies in the Barnett Shale are adjusting their operations and planning to increasingly fund development projects internally as opposed to seeking external funding as they have in the past.

So, what can we expect in the near term? Some companies operating in the Barnett Shale say they are slowing operations to some extent in 2009. Others say they will continue to increase production in 2009 by finding more efficient ways to allocate internal resources. However, all companies have said they are no longer offering leases at previously high bonuses. Some have said that any new leases offered in the near term will be in the range of $5,000 per acre. Only time will tell if competition among leasing companies pushes bonuses to anywhere near as high as in the past.

Producers eager to show a return on the investments they have made in the region have an incentive to develop the leases that they currently own. But they may start being more selective about the locations in which they operate. Municipalities that have imposed very restrictive and operationally expensive drilling ordinances may find that the squeezed profit margins have pushed drilling companies to other parts of the Barnett Shale.

As production levels increase, the need for additional gathering, processing, treating and pipeline infrastructure will increase as well. Many of the infrastructure projects currently in progress fill existing rather than future needs. These projects will likely continue. Projects designed to meet future needs are being re-evaluated and are increasingly tied to long-term firm contracts.

The honeymoon in the Barnett Shale may be over, but the marriage is still solid. A recent Associated Press article said that most current estimates of the Barnett Shale’s reserves are in the range of 40 Tcf, and highlighted that the field has continued to outpace expectations.

It is fair to expect that new drilling activity and new infrastructure projects may slow down in the near term while companies re-prioritize their activities, but nothing has altered the long-term outlook. The Barnett Shale continues to be a leading engine in the region’s economy and a key contributor to our nation’s energy supply and energy security.

About the Author
Ed Ireland is the executive director of the Barnett Shale Energy Education Council, a consortium of 11 of the leading energy companies operating in the region. For more information regarding pipelines and links to other sites visit www.bseec.org.