Can Natural Gas Companies Keep up With Growing Demand?

With U.S. natural gas supplies still plentiful and relatively cheap, demand for the cleaner-burning fuel is expected to keep growing.

In addition to demand from utility companies, industrial and petrochemical manufacturers, and other energy-intensive firms, some have identified liquefied natural gas, or LNG, exports and natural gas vehicles, or NGVs, as the wildcards that could cause future demand to soar.

But would U.S. natural gas producers – most of whom have curtailed gas drilling as much as possible over the past couple of years – be able to keep up if a surge in demand were to materialize?

Will gas producers be able to keep up?
The answer, according to Jim Tramuto, vice president of governmental and regulatory affairs for Southwestern Energy (SWN 0.14%), is a resounding yes. Speaking at the 2013 U.S. Energy Information Administration Energy Conference in Washington earlier this week, he expressed great confidence about the size of the U.S. shale gas resource base.

"Shale plays have gotten so much larger than anything we've seen over the past century," Tramuto said. He assured the conference attendees about the industry's ability to redeploy natural gas rigs to help bring supply and demand back into balance by saying:

Look at the number of rigs that are off the system. You have 246 horizontal [gas drilling] rigs. A year ago it was almost double that amount. Producers do have a way of regulating the choke, if you will, and either taking those rigs and putting them to work on the oil side, if you've got oil leases, or else we stack them.

Tramuto further pointed to efficiency gains across the industry as being the key for gas producers to keep pace with projected demand growth. "The resource base is there. [Producers] continue to get better and more efficient," he said. Indeed, efficiency gains over the past couple of years have been quite impressive and, for some producers, downright remarkable.

Efficiency gains translate to reduced costs
For instance, Southwestern slashed its average drilling time in the Fayetteville Shale to a little over five days per well, down from 17 days per well just a few years ago, while its drilling costs in the first quarter fell to about $2.2 million, down from $3.2 million a year earlier.

Similarly, Ultra Petroleum (UPL), another energy producer heavily weighted toward natural gas, managed to drill 40% of its Pinedale field wells in less than 10 days, compared to just 3% in 2010, while reducing well costs in the field to $4.4 million in the first quarter, down 6% from $4.7 million as of year-end 2012.

EXCO Resources (NYSE: XCO) has also seen meaningful improvements in drilling days, reporting that it drilled its most recent wells in about 34 days, down from 45-60 days a few years ago. These and other efficiency gains helped the Dallas-based company reduce its well costs by about 20% from the end of 2011, with current costs in its core DeSoto area down to about $7.8 million-$8 million.

Finally, Chesapeake Energy (CHKA.Q), the nation's second-largest gas producer, has also reported impressive efficiency gains, though it is not actively drilling for natural gas. In its Eagle Ford operations, which are the main driver of its oil production growth, the Oklahoma City-based company saw a 28% year-over-year decline in spud-to-spud cycle times, which fell from 25 days to just 18 days in the first quarter.

The bottom line
As you can see, companies across the board are reporting meaningful improvements in efficiency through improved drilling methods, such as drilling multiple wells from one pad, better water management, infrastructure improvements, and other efficiencies. These savings are translating into reduced drilling times and lower well costs, helping deliver strong bottom-line growth.

Indeed, efficiency improvements can help explain much of the large disconnection between the natural-gas-directed rig count, which was down about 56% from its 2012 peak of 811 as of the most recent data, and U.S. natural gas production, which continues to hover near record levels. This seems to suggest that, if demand were to spike at some point, energy producers should be able to redeploy their rigs toward gassy plays with relative ease.