Fuel rally puts gas producers in a frenzy

By Joe Carroll  |   2008-6-28  |     NEWSPAPER EDITION

US natural gas producers are drilling wells previously deemed too costly and resurrecting abandoned fields from Appalachia to the Rockies, spurred by the biggest rally in fuel prices in eight years.

Devon Energy Corp and Range Resources Corp are drilling horizontal wells that cost three times as much as traditional vertical shafts to unlock gas from rock formations that were unprofitable to exploit before this year's 75-percent gain by gas futures. The number of active US gas rigs rose to a nine-month high last week, according to a survey by Baker Hughes Inc.

"As prices are better you want to drill more wells to get more production on line as quickly as possible," said Larry Pinkston, chief executive officer at Unit Corp, an Oklahoma-based gas producer and drilling-rig operator. "So we definitely are drilling more wells."

The rise in gas futures in New York this year exceeded the 45-percent surge in oil and all commodities besides coal.

US gas demand probably will grow 4 percent this year, double the rate of new supply, said Roger Read, an analyst at Natixis Bleichroeder Inc in Houston.

Gas gained the most since prices more than doubled in the first half of 2000.

This month, futures rose above US$13 per million British thermal units for the first time since 2005, when Hurricanes Katrina and Rita caused wells in the Gulf of Mexico to lay idle.

Read attributed the gain to "unrelenting growth in electric power demand," lower-than-expected imports and increasing demand for alternatives to coal and oil.

An index of independent energy producers in the Standard & Poor's 500 climbed 29 percent this year, led by gains of more than 60 percent at Southwestern Energy Co and Chesapeake Energy Corp.

All 10 index members get most of their output from gas. Unit Corp, which isn't in the index, jumped 75 percent.

The S&P index of integrated producers such as Exxon Mobil Corp, driven more by oil wells and refining, has fallen 1.7 percent, Bloomberg News reported.

New drilling projects will boost US gas supplies in 2009 by 3.6 percent, the biggest increase since 1994, Read said. Gas is the most widely used US furnace fuel and the third-largest source of power generation, according to the Energy Department.