Renewed Focus on Oil

“Renewed Focus on Oil”

In 2010, we have seen the prices for natural gas decline by roughly 30% to around $4.00.  In the meantime, oil prices are back up over $80.  For much of 2009, the US energy industry was making a big push for natural gas as the resource became much more economical in the unconventional plays.   Horizontal drilling and hydraulic fracturing have made it much more possible for companies to exploit the shale plays for significant profit, and activity in this area has been at very high levels.  As a result, we are now seeing surplus in supplies and lower prices.  With natural gas prices back to lower levels, these plays are not quite as economical as they were last year.

According to the EIA, natural gas in storage increased to 1,756 bcf as of April 9, following an all-time high net injection for this time of year and establishing a new record level of natural gas in underground storage for the second week of April.   As of the latest report, inventories were 16.3% above the 5-year average (2005-2009).

Thus, some companies have put a renewed emphasis on oil resources.  Oil is back up over $80 and activity has steadily increased.  One of the largest indicators of this shift in emphasis to oil, at least for some companies, is the uptick in oil-focused M&A activity.  Apache Corp., based out of Houston, recently announced two significant acquisitions that have a significant focus on oil resources.  Last Monday, it announced the purchase of Devon Energy’s Gulf of Mexico shelf assets for $1.1 billion, and on Wednesday it was confirmed that it agreed to purchase Mariner Energy for $2.7 billion.  The Mariner deal marked Apache’s first significant move to the deepwater Gulf of Mexico.  Steve Farris, Apache’s CEO, was quoted as saying, “the real interest for us is that we really wanted to find an exploration growth engine on the oil side in the United States, and the best place to find that is in the deepwater Gulf of Mexico.”  

Other companies that have spent a significant amount of resources on its gas plays have also made it known that they plan to provide more balance with oil plays going forward.  Mark Pappas, the CEO of EOG Resources, said the company may seek partners to help develop its natural gas assets so it could raise capital to focus on developing its oil assets, particularly its acreage in the Eagle Ford Shale of South Texas.  Both Goodrich Petroleum and Carrizo Oil and Gas have both expressed their intent to raise capital to develop their resources in this area as well.

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