New Orleans, 23 march 2010

The boom in U.S. natural gas drilling looks likely to turn to bust as slumping gas prices prompt energy producers to chop spending on new wells and turn toward crude oil projects. Executives from several companies at the Howard Weil energy conference said they had shifted budgets away from new gas projects and instead plan to drill new oil wells.

"We are going to be reducing our capital exposure on natural gas drilling (and) we will be reallocating that capital to oil ideas," Cabot Oil & Gas Chief Executive Dan O. Dinges told the conference.

Dinges' comments were echoed by several other companies eager to show investors they were reacting to the shifting energy prices. "We will be bringing on major projects, at least one and maybe two per year going out to 2015," Noble Energy Chief Executive Charles Davidson told the conference. "None of these projects are U.S. gas."

Natural gas prices have fallen by about one-third since the start of the year to about $4 per million British thermal units, while crude oil prices have firmed about 3 percent to $81.81 per barrel.

U.S. crude oil traded more than 20 times higher than the price of natural gas last week, well above the five-year average of 10.8 and the 20-year average of 9.6, according to Reuters data.

Gas prices typically decline as winter heating demand fades and before summer power usage rises. But the rush to please investors has meant companies are tapping ever more supplies from shale rock formations that have reinvigorated an industry that once feared U.S. natural gas fields were disappearing.

"Wall Street has focused exclusively on production growth rather than full-cycle returns," Larry Nichols, chief executive of Devon Energy, told Reuters, referring to the wide gyrations in gas prices that have traditionally influenced output levels.

Technology to pull gas from the dense shale rock formations has improved in recent years, opening up new fields that could hold enough supply to meet U.S. demand for decades.

In particular, companies have rushed to snap up properties in Louisiana's Haynesville shale and the Marcellus Shale field that stretches from West Virginia and Ohio across Pennsylvania.

Rig Up

Data from oil field services company Baker Hughes showed the number of rigs drilling new natural gas wells rose by 12 in the week that ended March 19, to 939. That was up from 857 a year ago. Much of that increase has been in the Marcellus shale, where nearly three times as many rigs were drilling last week compared with a year ago.

Even with the downturn in prices this year, shale resources remain attractive to the industry for the long term, since the wells are far more profitable because they produce at higher rates and do not decline as quickly as many conventional fields do.

The shale strategy received a big boost when Exxon Mobil announced in December it would buy XTO Energy , one of the largest property holders in the Marcellus. Other top global oil producers such as Statoil and Total have also entered the North American gas plays, a shift that is not lost on the smaller exploration and production companies.

"They are moving to develop natural gas in the United States, and that tells me it must be pretty hard to find oil around the world, and that tells me that's the product I'd like to have," said SandRidge Energy CEO Tom Ward.

Large companies will likely continue to develop shale fields even if prices slip further because they have little experience in the hydrofracturing technology and are eager to test new wells.

One such company was Marathon Oil , one of the largest U.S. integrated oil companies, which will conduct test drilling in both the Marcellus and Haynesvillle fields this year.

Smaller companies, such as Southwestern Energy , will react more dramatically. It will cut $300 million from its planned $2.1 billion budget this year if prices remain near $4 for an extended period, CEO Steve Mueller told the conference.

But Southwestern still expects to increase gas production despite the weak conditions. "If it stays where it's at, we'll still have a good year," Mueller said. "We'll probably set records, but it just won't be quite as good."

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