Natural Gas Rig Numbers Down, Oil Rig Numbers Up in U.S.

Kent Moors, writing on the Seeking Alpha website, comments on his observation from Baker Hughes well rig data for the U.S. that the number of rigs used to drill for natural gas has gone down over the same period last year, but that the number of rigs drilling for oil has skyrocketed.

The gas-rig-usage figure declined by 36 for the week and stands 128 below the count for this week in 2010. In contrast, oil rigs increased 29 for the week and is up approximately 50% (1,132 versus 763) over the same week last year.

Now such a decline in gas well drilling, coming off similar weakening numbers over the past month, seems to indicate that the market has concerns over too much gas supply coming on line too quickly.

This market sentiment, of course, is a result of the rapid acceleration in unconventional gas drilling, especially in shale basins such as the Marcellus, Fayetteville, and Barnett. And the continued emphasis on shale continues to be observed in the rig figures.*

He says the data appears to say that the rigs are chasing a higher profit margin in oil and away from natural gas because of low prices. But then he adds:

Well, that is not as simple a conclusion as it would seem.

For one thing, the number of gas wells drilled over the last 18 months has been nothing short of staggering. The volume already flowing into the network has been increasing available gas for each of the last two years.

In fact, there is so much extractable shale gas that the overall amount available to the market could increase by 25% per year over the next few years.*

Moors’ conclusion is that more wells will need to be brought online after this initial lull in activity to keep feeding new demand for natural gas, especially as electricity power-generating plants convert from coal to natural gas, and that the current decrease in drilling rigs for natural gas is a temporary phenomenon. He also believes there will be a sharp increase in demand for midstream services, especially for processing of wet gas (natural gas liquids, like ethane).

*Seeking Alpha (Dec 12, 2011) – Key Gas Indicators Suggest Another Midstream Push