Seeking Major Profits in Natural Gas Production (BP, CHK, XOM, ECA, COP, DVN, EOG, APC, UPL, HK)

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The US Energy Information Administration has just released its summary of US oil and natural gas reserves as of the end of 2009 and the look-back will only highlight the future ambition that natural gas players have.  The agency noted that crude oil reserves grew 8.6% and natural gas reserves grew 11% during the year. The growth in natural gas reserves is entirely due to growth in what is known as ‘wet’ gas, that is natural gas that contains substantial amounts of natural gas liquids, or NGLs.

In connection with that report, the EIA also posted a list of the Top 100 oil and gas operators based on data supplied to both the EIA and the SEC.  In 2009, about 90% of all proved reserves of oil and gas are operated by the top 100. The top 10 accounted for 54% of crude oil reserves and 48% of wet gas reserves. Interestingly, the top 100 operators represent less than 1% of the more than 14,000 US operators.

We wanted to take a look at the top ten natural gas operators and where they are producing most of their product. Ranked by proved reserves, the top 10 operators, in order, are BP plc (NYSE: BP), Chesapeake Energy Corp. (NYSE: CHK), XTO Energy (before its 2010 acquisition), Encana Corp. (NYSE: ECA), ConocoPhillips (NYSE: COP), Devon Energy Corp. (NYSE: DVN), ExxonMobil Corp. (NYSE: XOM) (before the acquistion of XTO), EOG Resources Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), and Ultra Petroleum Inc. (NYSE: UPL).  Together, these 10 companies operate 135 trillion cubic feet of natural gas reserves.

The largest increase in reserves came in the state of Louisiana, where proved reserves in the Haynesville shale play boomed by 77%, to 9.2 trillion cubic feet. Shale gas accounted for more than 90% of the total additions to US wet gas reserves in 2009.

The shale gas play that produces the most gas is the Barnett shale, centered around the Dallas-Fort Worth area. In 2009, production from the Barnett shale totaled 1.75 trillion cubic feet, and the total reserves total 26.5 trillion cubic feet. Reserves in the Barnett shale increased by about 4 trillion cubic feet, even with production totaling 318 billion cubic feet.

The Haynesville shale, including another area known as the Bossier shale, saw reserves climb from just over 1 trillion cubic feet in 2008 to nearly 10.5 trillion cubic feet in 2009. Production grew more than tenfold, from 25 billion cubic feet to 321 billion cubic feet.

The two largest operators in the Barnett shale are Chesapeake and Devon. The two largest operators in the Haynesville shale are Chesapeake and Petrohawk Energy Corp. (NYSE: HK), according to Oil & Gas Financial Journal.

Of the top 10 operators, all but Anadarko have substantial operations in the Barnett shale. The Haynesville shale got a lot of attention in 2009, but the focus has shifted a bit to the Eagle Ford play on the Texas-Mexico border, where the gas has a very high concentration of NGLs.

The NGLs — butane, propane, pentane, and the like — are what make drilling for and producing natural gas economically viable while prices for natural gas hover around $4.00-$4.30 per thousand cubic feet. Gas prices need to rise to between $5 and $7 per thousand cubic feet to see the gas by itself profitable. Compare that with an NGL price of around $35/barrel, and its plain to see why the next big move is toward liquids-rich fields. Chesapeake said in its most recent quarterly report that it plans to increase liquids production by 80% in 2011 and another 60% in 2012.

For the foreseeable future, the Barnett shale remains the mother lode of US shale gas plays. It could well be displaced in the future, but that day is a ways off yet.

Paul Ausick