NORTH AMERICAN DRILLING SLOWDOWN LOOMING?

With the prospect of another warm winter that may result in a record level of natural gas remaining in storage at the end of the heating season, the possibility for a new period of low prices is becoming a distinct possibility. This emerging trend increases the potential for a selective drilling slowdown, accompanied by a sharp downward production response in some gas plays across North America.

* While a drilling downturn is manifesting itself in the western Canadian basins, US rig activity to date has remained relatively stable as hedging practices, expectations of higher prices in the future, rig contracting, and few alternative options have kept US operators staying the course.
* CERA expects that drilling in the unconventional plays of East Texas, the Mid-Continent, and the Rockies will continue at strong levels, while downturn risk intensifies in the conventional plays of western Canada, the Permian Basin, and the Gulf Region.
* However, if a serious drop in drilling were to occur owing to an extended period of low prices, the subsequent decline in production could be rapid, exaggerated by the typical production profile of unconventional gas wells that exhibit first and second year decline rates of 60 to 80 percent.
* A potential drilling slowdown due to low prices could portend a period of prices above CERA's current outlook, and these price levels could prevail through the medium term.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.