Don Briggs – Louisiana Oil & Gas Association -
This coming Wednesday at the State Mineral Boards monthly meeting, Board members may very possibly be considering proposals by DNR Secretary Scott Angelle, designed to boost the floundering Louisiana Coastal Zone drilling market. While the inland water rig count has climbed back from an historic low this past July of 5 rigs to the current 14 rigs, inland drilling activity is still 37% below the past 5 year average.
Secretary Angelle has publicly stated, “Oil and gas companies clearly have a choice where they spend their exploration dollars and we want them spent in Louisiana.” Angelle’s timing could well be on target for several different reasons.
The oil and gas exploration business is a “price sensitive” industry. Simply put, when the price of oil or natural gas is up, we invest and drill more. When prices are down, we drill less. That is why we have witnessed over the years the ups and downs of the industry, the never-ending roller coaster ride. Today, we are witnessing a little different phenomenon in the industry.
Historically, according to the Energy Information Administration (EIA), from 1990 to 2007 the average price ratio of natural gas to crude oil has been about 8.6 to 1. For instance, if natural gas prices were at $1 per MCF then oil prices would be at $8.60 per barrel. Today with oil prices at $86 per barrel and gas prices around $4, the spread is 21 to 1. Analyst are predicting oil prices to be in the mid to high eighties for the coming year. However, the EIA recently dropped its outlook for the natural gas prices in 2010, from an average of $5.17 per million BTU down to $4.44. Natural gas is certainly being sold at a discount.
What does all this mean?
It means oil and gas companies are shifting gears and moving to explore for the good oil fashioned black gold, oil. Floyd Wilson, Chairman and CEO of Petrohawk Energy noted, “With gas in the $4 range and oil in the $80s, it’s valuable to be able to switch to more oil.” With this in mind, Petrohawk announced this past week that they would cut back on natural gas drilling and double up on oil drilling on acreage it holds in South Texas.
Petrohawk was not alone. Natural gas giant Chesapeake Energy’s CEO, Aubrey McClendon, told attendees at a recent energy conference, “The economics just compel you to look for oil rather than natural gas right now.” Another company moving to the oil markets is Houston based EOG resources, with more than 500,000 acres in South Texas’s Eagle Ford Shale formation.
DNR Secretary Scott Angelle’s encouragement to develop in the Coastal Zone of Louisiana is timely and important to the state as well as to the oil and gas industry. The State of Louisiana is the largest landowner in the state, thus the recipient of not only severance taxes on the oil and natural gas production but also reaps the benefits of significant royalty interest payments. With the states current budgetary constraints, any boost to the general fund will be helpful.