January 23, 2012 / 9:49 PM / in 6 years

WRAPUP 3-Dirt cheap natgas prices force drillers to tighten taps

* Chesapeake to shut in gas production

* Company to move rigs to lucrative liquids plays

* Halliburton to move frack crews to liquids plays

* Talisman also wary of cheap gas fields

* Market unsure of real impact (Adds context, Encana reaction, EIA shale outlook)

By Edward McAllister

NEW YORK, Jan 23 (Reuters) - Energy companies that have watched U.S. natural gas prices sink to 10-year lows are cutting production and slowing drilling, but it may not be enough to stem a price collapse that has squeezed their profits for months.

New technologies have helped U.S. drillers unlock decades of supply from shale gas deposits. Surging output has pressured prices during one of the mildest winters on record and coaxed companies toward more lucrative shale oil plays.

President Obama has earmarked the booming natural gas industry as a cornerstone of U.S. energy policy aimed at lowering carbon emissions and reducing U.S. reliance on foreign oil. But with demand lagging booming supplies, ultra-low prices have hurt producers.

Chesapeake Energy, the No. 2 U.S. gas producer, announced on Monday an immediate production cut of 8 percent, or 0.5 billion cubic feet (bcf) per day of U.S. production, a decision that could be echoed by other major players. The Oklahoma-based company said if prices continued to fall, it was prepared to double that cut.

It also plans a 50 percent reduction in drilling rigs in “dry gas” fields that produce only natural gas so that more oil-based liquids plays can be developed. Natural gas prices shot up 8 percent following the news, after falling 20 percent this month to the lowest level since 2002.

“An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise,” Chief Executive Officer Aubrey McClendon said in a statement.

Chesapeake said it would drop the number of rigs drilling at dry gas fields to about 24 by the second quarter from 47 currently, or about one-third the number it averaged last year. Chesapeake shares rose 6.3 percent to $22.28 dollars a share after the announcement, while other gas-focused companies also saw gains.

The decision follows Talisman Energy, Canada’s fifth-largest independent oil explorer, which said last week that it has moved rigs away from the gas-rich Marcellus shale deposit in favor of liquids plays elsewhere.

U.S. natural gas output has soared to record levels as the energy industry has plowed billions of dollars into developing shale rock fields that were once too difficult and expensive to tap.

The advent of hydraulic fracturing, or “fracking,” over the past decade has opened up those vast fields to drillers, but has created a glut of supply that has made some of those fields uneconomical.

“I’d expect others to start following suit,” said, Kenenth Carroll, analyst with Johnson Rice & Co, noting that Southwestern Energy, the No 8 producer through the third quarter of last year, has discussed cutting its spending.

Encana Corp, Canada’s largest natural gas producer, has said it will focus its spending on liquids plays over dry gas this year, although on Monday it said it had no immediate plans to shut in production due to low prices.

“We have not shut any gas in,” said Alan Boras, a spokesman for the company. “But we continue to monitor the impacts on cash flow.”

Still, as producers shy from natural gas plays, so are rig operators.

Oil services company Halliburton said it was shifting eight fracking crews to work on more liquids-rich basins that produce more attractively priced oil and natural gas liquids such as propane, butane or ethane rather than the dry gas areas that produce natural gas alone.

An expected boom in shale oil is expected to raise output by more than 20 percent over the next decade, helping to reduce import needs, according to a report from the U.S. Energy Information Administration on Monday.

TOO LITTLE, TOO LATE?

Despite the proposed cuts, analysts and traders say it should take about a 3 bcf per day cut to tighten the oversupplied market this year -- six times what Chesapeake is undertaking.

Gas in storage is now 20 percent higher than 2011, raising concerns that capacity may be exceeded later this year, which would cause havoc for producers and utilities with no market for their gas.

“Even with the cuts, it’s not clear what the details will be in terms of rebalancing the market,” said Tim Evans, energy analyst at Citi Futures Perspective. “It may prove a greater success in keeping a floor under prices than in providing an escalator for price recovery.”

Moreover potentially more than 2 bcf per day of gas this year produced alongside liquids will still end up in the market.

However, Chesapeake said it’s production cuts in Louisiana’s Haynesville and Texas’ Barnett shale -- which accounted for virtually all of the 14 bcf increase in U.S. production over the past five years -- should mean lower overall U.S. natural gas production in 2012 than in 2011.

The U.S. government expects natural gas production to increase by 1.4 bcf per day this year to a record 67.35 bcf per day, though it did revise down its estimate this month. (Additional reporting by Matt Daily and Eileen Houlihan in New York and Scott Haggett in Calgary; Editing by David Gregorio)

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