Subscribe to Blog ContentThe law of supply and demand is basic economics. You know that low prices, low demand and high supplies equals less drilling. Despite this, the rig count climbed 31 percent from one year ago. Furthermore, oil and gas companies are going full-speed ahead with natural gas drilling.
Why would that happen? It's not the law of supply and demand, but the real estate and lease contract terms that forced the increased drilling activity. These leases require drilling activity take place before the lease is up, which is usually three years for natural gas leases. If the oilfield company doesn't drill, then it forfeits the lease. So it's drill or lose the lease. The growing drilling activity is a factor in dropping natural gas prices.
Some companies try to keep costs down by drilling small wells while staying active per the lease terms. Unfortunately, some leases forbid this and expect full scale drilling. Despite the costs of drilling at a time when prices are low, oil and gas companies choose to protect long-term assets rather than losing the lease. Analysts believe that lease-related drilling will go on through 2011.
All of this clearly shows the cause of low gas prices. Yet, Investor Daily reports that gas prices may reach $6 by the end of 2010, quoting Robert Turnham, president of Goodrich Petroleum. One reason may be from the higher demand for natural gas due to cold weather and increased natural gas use in the industrial market. Another factor is the Department of Energy's report on the natural gas surplus, which turned out smaller than expected.
We've reported that oil and gas companies have changed directions to put more resources in oil than in natural gas. Even so, companies aren't completely giving up on natural gas. In fact, Devon Energy still believes in the future of natural gas. Who knows? The Gulf of Mexico situation may change the oil and gas industry's direction back to natural gas.
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