(Reuters) – About six years ago, an army of agents hired by energy companies started desperately courting landowners across the United States whose farms and ranches happened to sit atop some of the richest oil and gas deposits in the world. And so began one of the biggest land grabs in recent memory.
Those days are over.
U.S. energy titan Chesapeake Energy is quickly cutting back on an aggressive land-leasing program that in recent years has made it one of America’s largest leaseholders, putting an end to half a decade of frenzied energy wildcatting.
Beset by growing governance and financial problems, and a sharp slump in natural gas prices, the No. 2 U.S. gas driller is reducing by half the ranks of its agents, known in the industry as landmen.
With little evidence that its competitors are taking on the role of leading industry lease-buyer, Chesapeake’s new found frugality is expected to usher in a more sedate period of U.S. land buying, and a sizeable cultural shift for an industry that has been acquiring new acreage at almost any cost.
A surge in drilling into rich shale-gas seams from Pennsylvania to Texas has pushed natural gas prices to 10-year lows, forcing producers, including Chesapeake, to cut output and put the brakes on new wells.
Drilling simply to hold on to leases represents about half of U.S. natural gas output, analysts say, which has helped keep production at record highs despite plummeting prices. Leases held by energy companies tend to last about three years, but will typically remain valid indefinitely if an energy company drills wells and produces fuel on the leased acreage.
It should be fairly easy for drillers to re-hire agents and secure more land when prices recover, according to landmen sources, and production is not expected to be affected immediately. But a lull in leasing could briefly affect production longer term, given that it takes up to six months to secure large tracts of land.
“Chesapeake has always been a bellwether for where the next big play is. It would come, lease large blocks and send a signal to the market,” said Adam Bedard, senior director at Bentek Energy in Colorado. “Without them, the pace of land acquisition might slow.”
In a move to mollify disgruntled shareholders, Chesapeake plans to reduce its use of contracted landmen from 1,300 now to 650 by the end of the year, said Chief Executive Aubrey McClendon, who was stripped of his chairmanship last month after Reuters reported a series of governance missteps.
The reduction, which is expected to help reduce towering debt levels, marks an 80 percent decrease from its peak of 3,400 landmen, McClendon said.
The cull has begun. Over the past month, 225 contracted landmen were cut from Chesapeake jobs, said one Ohio-based landman, who, like most in the close-knit industry, would only speak off the record.
“Chesapeake’s activity level in the Appalachian region is minimal now. It has devastated the (landman) industry,” the source said. “The Chesapeake debacle is one thing, but the rest of the industry shortfall is because a lot of the projects are intertwined with Chesapeake,” he added.
The Oklahoma-based company has become one of the largest leaseholders in the United States, amassing more than 15 million acres of land for drilling or an area about the size of West Virginia.
One mid-sized U.S. brokerage that does lease work for Chesapeake has experienced a 15 percent to 20 percent fall in business over the last 90 days due to a slowdown not just in Chesapeake activity but across the board, a manager for operations at its eastern division told Reuters. About 15 percent of that company’s business comes from Chesapeake, he said.
“We are getting to the point where companies are becoming more cautious – that is what we are seeing,” he said, asking that he not be named.
Other major producers, including Encana Corp, Royal Dutch Shell and Chevron, said they are not planning to materially change their strategy of land acquisition or staffing numbers, suggesting a gap might be left as Chesapeake, long the pioneer in drill leasing, retreats.
“We have not reduced our land staff nor have we made any changes in the way we conduct land operations,” said a spokesman for Encana, one of Chesapeake’s main land-leasing rivals. Encana employs an in-house staff of about 170 workers in its land department. Shell also said it was “not planning any major staffing level changes in our land function for leasing activity.”
Landmen in the field reckon companies are now well-placed to increase leasing again when they need to, but it could take up to six months between a decision to lease the land and the drilling, potentially creating a lull in activity, sources said.
While a fall in leasing will affect the landmen, it is unlikely to affect gas output for quite some time given the amount of land already leased and the hundreds of wells drilled that have yet to begin producing.
“The huge land grabs in the gas plays are coming to an end,” said one energy hedge fund manager. “Even without more leasing, however, these companies have backlogged a huge inventory of drilling locations.”
The backlog of 3,500 oil and gas wells in the United States is about 1,000 more than usual, according to Randall Collum, a natural gas analyst at Genscape in Houston.
It could take more than a year to exhaust the natural gas portion of that supply as pipelines come online to connect new producing regions, such as in Ohio, to areas of higher demand, he said. Moreover, the reserves accumulated over the last decade are expected to take longer to dwindle away.
That scenario is likely to put a cap on prices in the near term, with or without Chesapeake.
AFTER THE BOOM
When U.S. drillers employed new technologies during the last decade to economically tap oil and gas from shale rock, results showed the potential for a massive revival in waning domestic production.
In 2006 and 2007, companies began rushing to acquire new leases. Geologists pored over maps, in search of the sweetest acreage. Landmen were hired like never before, court houses in energy-rich regions filled with workers quickly securing leases. Rural and depressed areas in Pennsylvania, North Dakota, and Ohio became, by geological coincidence, new target areas for energy companies.
Teams of between 50 and 100 landmen were charged with securing hundreds of thousands of acres in a matter of weeks. Some would knock on landowners’ doors, while others specializing in title work would make the lease legally secure and determine, among other things, who receives royalties on the production.
Chesapeake led the charge, spending billions of dollars a year on speculative leasing, helping to push land prices higher in energy-rich regions. In 2011, it became the lead acreage holder in the Utica formation shale in Ohio with 1.5 million acres, and was the first to publish production figures from new wells there.
After Chesapeake arrived, other majors such as Anadarko and Exxon Mobil quickly followed. Much of the best drilling areas have already been swept up in what is now thought – though not fully proven – to be one of the most promising oil and gas plays in the country.
Now, five years after the boom began, natural gas output is at an all time high. The success has, in many ways, backfired. Prices have dropped so far that companies can barely afford to drill in pure natural gas plays. Chesapeake, the self-proclaimed ‘champion’ of U.S. natural gas, is facing a $10 billion cash-flow shortfall this year, forcing it to rein in spending.
“It will slow down the overall aggressiveness if Chesapeake isn’t out there leading the charge,” said Genscape’s Collum. “But it is all about prices. If prices rise then companies will come back in.”
- Chespeake Energy Seeks to Void Order to Buy Energy Rights – Bloomberg (bloomberg.com)
- Land owner caught between energy giants (business.financialpost.com)
- Report: Chesapeake engaged in price fixing on land (bizjournals.com)
Beleaguered natural gas producers in Western Canada are going to have wait a little longer for relief from severely depressed prices. Janine McArdle, the senior executive in charge of the Kitimat LNG project at Houston-based Apache Corp., said the facility’s planned startup will take an extra year as the company continues to look for firm contracts with buyers in Asia.
Apache’s proposed natural gas liquefaction plant on the northern British Columbia coast, which it owns with Encana Corp. and EOG Resource Inc., would be the first in line to ship large quantities of LNG to Asia.
The first cargo is now expected to leave Canada in 2017, a year behind the latest plans. The project has regulatory approval, but Apache needs to be sure it has a market for the gas and that the project is economic before taking a final investment decision, Ms. McArdle, senior vice-president for gas monetization at Apache, North America’s largest oil and gas independent producer, said Wednesday.
Construction of a 10-million tonnes a year plant would then take 50 to 60 months.
“We are moving as quickly as we possibly can given that Canada is new to these buyers, and we are relatively new to the buyers as Apache,” she said on the sidelines of an industry conference.
“We have been talking to multiple markets simultaneously and there is a lot of interest. I always have to remind people that these are 20, 30-year marriages. These things don’t happen overnight.”
Next in line is Royal Dutch Shell PLC’s B.C. LNG project, which is slated for startup in 2019. Shell gave the tentative go-ahead to the project last month with three Asian partners that will secure Canadian gas has customers — PetroChina, Mitsubishi Corp. and Korea Gas Corp. However, the project has yet to obtain regulatory approval.
- Apache discovers massive shale gas field in B.C.
- Alberta looking at ways to expand natural gas use, including in vehicles
A handful of other projects are also in various planning stages, but they are further behind.
It’s a tense time for Western Canadian natural gas producers, who are watching closely progress on LNG facilities on the B.C. coast so they can start monetizing reserves already found and look for new ones. The facilities will enable exports to Asia and help alleviate a massive shale supply glut in North America that has depressed prices to 10-year lows.
Asian demand for LNG is expected to increase to 35 billion cubic feet a day by 2020, from 20 bcf today, said Ed Kallio, director of gas consulting at Ziff Energy Group, a Calgary-based gas forecasting firm. He expects demand to outstrip supply in Asia by 2016/2017.
The good news is that there is plenty of gas to keep the projects full. Apache announced last week that it discovered in the Liard Basin a new shale gas field containing as much as 48 trillion cubic feet of recoverable natural gas which it characterized as one of the world’s best.
The find motivates Apache to develop an alternative market for Canada, Ms. McArdle said.
It also further boosts Canada’s 500-trillion cubic feet of natural gas reserves, a number that has ballooned in recent years thanks to shale discoveries such as the Horn River, the Montney and the Cordova, all in British Columbia. To put it in context, the now-shelved Mackenzie Gas Project was underpinned by six trillion cubic feet of reserves in the Mackenzie Delta. The number seemed immense before shale gas was unlocked.
Mr. Kallio, who also spoke at the conference, said it will take a lot more than LNG exports to restore balance to the natural gas market and Western Canadian producers will be stuck in a low-price environment for several years. Demand will have to increase, and supply will come down as production of liquids-rich natural gas runs out of steam with weakening of liquids prices, as drilling promoted by land terms tapers off, and if producers do their part by being more disciplined, he said.
“We had such a rush and we had a bunch of cowboys out there, including Chesapeake [Energy Corp.] and Encana that drilled like crazy, [because] they had nice hedges on through the end of this year. But they have very little hedged next year, and that is why they are selling assets — they are selling fingers, toes, kidneys, prized assets to get the cash flows up” and hang in until the next rising market, Mr. Kallio said.
- Shell races Apache to export LNG from Kitimat to Asia (bizjournals.com)
- Apache discovers massive shale gas field in B.C. (business.financialpost.com)
- Natural gas producers pin hopes on Asian market as prices sink (business.financialpost.com)
Located at The Relay Station in Frierson, the station which will serve the fueling needs of heavy duty truck fleets is open for public use. The station is currently being utilized by Heckmann Water Resources (HWR), an Encana partner in water sustainability in the natural gas industry.
HWR recently ordered 200 new LNG big-rig trucks, 50 of which have been deployed to date. California-based Heckmann Corporation, parent company to HWR, provides water management services to Encana and other producers in the Haynesville resource play.
Encana also recently secured a contract with Pivotal LNG, a subsidiary of AGL Resources Inc. which owns and operates a major liquefaction facility.
“We are very pleased to be part of an innovative Canadian and American solution to expand the use of LNG. This new station is a major step towards encouraging companies to convert vehicles to run on affordable, environmentally-responsible natural gas,” said Eric Marsh, Executive Vice-President, Encana Corporation & Senior Vice-President, USA Division.
Encana works with supply chain partners and other external heavy duty fleets by offering fueling solutions to help them better manage fuel usage and realize the cost savings of natural gas. Encana is quickly growing in its efforts to commercially develop natural gas for transportation. Additionally, Encana owns and operates four mobile LNG fueling stations (two in Louisiana) and six compressed natural gas (CNG) stations. In leading by example, Encana has converted nearly half of their fleet field vehicles in Louisiana operations to utilize CNG. They have also retrofitted drilling rig engines to run on natural gas in their U.S. operations, four of which run on LNG.
Natural gas powered cars and trucks are fueled with CNG or LNG and operate similarly to gasoline or diesel powered vehicles and generally have a longer operating life due to the cleaner combustion. Converting freight trucks and commercial vehicles has an immediate impact on saving fuel costs and reducing carbon emissions. Converting one 18-wheeler from diesel to LNG is equivalent to removing the emissions of about 325 cars from the road.