Gas Rigs in U.S. Slump as Pipeline Capacity Limits Drilling

May 23, 2014 3:53 pm ET

(Updates with comments from analysts starting in fourth paragraph.)

May 23 (Bloomberg) -- Rigs targeting natural gas in the U.S. slipped from a one-month high with drillers limited by a shortage of pipeline capacity to move supplies to market.

The gas count dropped by one to 325 this week, data posted on Baker Hughes Inc.’s website today show. Rigs drilling for the power-plant fuel declined in U.S. plays from the Fayetteville of Arkansas to the Haynesville in Arkansas, Louisiana and Texas, the Houston-based field services company said. Gas rigs in the Marcellus of the eastern U.S. were unchanged at 81, down from this year’s peak of 87.

U.S. rigs drilling for natural gas slid by 29 in the past year even as prices gained, underscoring the record volume from existing rigs. The boom has companies jockeying for transportation capacity as output in the Marcellus alone is set to rise by 25 percent in June from a year earlier, according to Bloomberg Industries data.

“Why drill it if you can’t sell it?” James Williams, president of energy consulting firm WTRG Economics, said today by telephone from London, Arkansas. “There are still several thousand wells waiting to connect to pipelines.”

Pipeline Operators

Pipeline operators including Kinder Morgan Energy Partners, Williams Cos. Inc. and Spectra Energy Corp. have proposed projects to bring more gas from emerging supply basins to markets in the U.S. Gulf Coast and Northeast, where demand is forecast to gain on the retirement of coal, nuclear and oil- fueled power plants.

“There’s definitely a pipeline collection issue really just about everywhere,” Tim Evans, an energy analyst at Citi Futures in New York, said by telephone today. “So that’s a potential source of additional natural gas flow as the pipeline infrastructure catches up to the level of potential output.”

U.S. gas stockpiles rose 106 billion cubic feet last week to 1.266 trillion, the Energy Information Administration, the Energy Department’s statistical arm. Supplies were still 42.7 percent below the five-year average and 37.9 percent under year- earlier inventories.

Natural gas for June delivery increased 4.6 cents, or 1.1 percent, to settle at $4.405 per million British thermal units today on the New York Mercantile Exchange. Prices have risen 3.4 percent in the past year.

Rising Output

Gas output per rig is expected to rise to a record 6.52 million cubic feet a day in the Marcellus in June and reach a record 513,000 cubic feet a day in the Bakken, EIA data show.

“Along with the rig counts, we want to be watching actual natural gas production because that continues to show year-on- year growth,” Evans said. “So one of the questions here is, ‘If you did have an extra 50 rigs, would that be too much supply?’”

Rigs targeting oil in the U.S. also fell this week, losing three to 1,528, as drilling slipped in Texas’s Eagle Ford formation. The Permian Basin of Texas and New Mexico gained one oil rig to 540, the highest level in Baker Hughes data going back to February 2011.

“It’s easily the highest level of drilling there since the early 1980s,” Williams said. “Oil drilling remains strong.”

Adding Acres

Exxon Mobil Corp.’s XTO Energy Inc. unit added almost 26,000 acres to its leasehold in the Permian Basin May 21. The company said in a statement that most of the acreage is in the Midland Basin, a “prolific area where we expect rapid, profitable development of multiple horizons.”

U.S. oil production climbed 6,000 barrels a day in the week ended May 16 to 8.434 million, the highest level since 1986, data compiled by EIA show. Oil supplies slid 7.23 million barrels to 391.3 million, according to the EIA.

West Texas Intermediate crude for July delivery rose 61 cents, or 0.6 percent, to close at $104.35 a barrel on the Nymex, up 11 percent in the past year.

The total rig count has added 100 this year as energy producers use more hydraulic fracturing and horizontal drilling to draw record volumes of oil and gas out of from U.S. shale formations. The U.S. met 87 percent of its energy needs in 2013 and 90 percent in December, the most since March 1985, according to the EIA.