BG Group cuts US shale gas drilling amid low prices
By ALEXIS FLYNN
UK energy firm BG Group is proposing to scale back 80% of its planned US shale gas drilling activity for this year in response to a sharp fall in prices, the company's chief executive said Thursday.
"We now plan to have eight rigs in operation this year from 35," said CEO Frank Chapman, who added that the move was directly related to the sharp fall in US natural gas prices.
New extraction techniques that allow producers to unlock previously untouched shale gas fields have led to abundant supply, pushing down prices to a decade low.
Natural gas for March delivery was recently 0.5 cent lower at $2.467 a million British thermal units on the New York Mercantile Exchange.
US natural gas stockpiles stood at 2.966 trillion cubic feet last week, more than 25% above the five-year average for this time of year. Inventories were at all-time highs late last year.
Few expect producers to cut output to levels that would stem the price declines, as many fields produce natural gas in tandem with other fuel products that are still fetching good prices.
Chapman said part of the reason for the rapid rise in supply relative to demand was also that some producers were obliged to drill a minimum number of wells in order to satisfy the terms of their license agreements.
"Entrants from farm-in and carry-down agreements have to maintain a tough drilling program," said Chapman.
However, Chapman said he was "optimistic" on the medium and longer term prognosis for US gas demand.
"We have seen a seasonal shift in demand, which has been very weak due to the warm winter."
Barclays Capital said Wednesday it expects US gas supply will grow by 2.7 billion cubic feet a day, or 4.3%, this year, and said that output cuts announced in recent weeks are too small.
"Our expectation is that storage inventories will bulge through this year," Barclays said in its research report.
BG Group is positioned to benefit regardless of whether prices rise or fall, said Chapman, explaining that its plans to liquefy and export US natural gas from the Sabine Pass terminal - and potentially the Lake Charles facility to - meant that it could profit from the difference in price paid by North American consumers and those that energy-hungry Asian importers are willing to pay.
"If prices rise, that means exploration and production profits increase," said Chapman, adding that prices "would have to be a lot higher for our LNG profits to suffer."
Dow Jones Newswires
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