Drilling When Natural Gas Prices Are Low

It's basic economics: the law of supply and demand. When prices are low, demand is low and supplies are high, companies slow down production. Yet, many exploration and production companies continue with natural gas drilling activities and the rig count has gone up 31 percent from the previous year.

The reason for the drilling is real estate and lease terms. Leases tend to have a requirement to do drilling by a set time -- typically three years for shale leases -- or give up rights to the lease. It's use it or lose it, or in this case, drill it or lose it. Because of the increased drilling activity to avoid losing leases, gas prices are dropping.

While some companies drill small wells to meet a lease's terms, some lease forbid this. Nonetheless, oilfield companies prefer to drill to protect long-term assets instead of giving up the lease. Industry analysts say lease-driven drilling may continue through 2011.

Despite reasonable explanations for low gas prices, one report says that gas prices may climb up to $6 by the end of 2010. Robert Turnham, president of Goodrich Petroleum, made the statement in Investor Daily. One reason for the rise could be the higher demand for natural gas due to cold weather. Moreover, the industrial market has been increasing its use of natural gas. Also possibly affecting recent increased prices in the Department of Energy's report states that natural gas storage was not as large as expected.

Many oil and gas companies have recently changed strategies to focus more on oil and less on gas. Nonetheless, companies like Devon Energy still believe that natural gas has a future. Besides, with the Deepwater Horizon oil spill, we may see increased interest in natural gas as the oil spill reminds us of the negative consequences on the environment.