Gas glut affects Shell drilling strategy

Royal Dutch Shell PLC., Europe’s largest oil company, won’t increase its spending on drilling shale fields this year because of low natural gas prices.

“It wasn’t so long ago that gas prices were still at a level where everybody was drilling almost as fast as you could reasonably make it happen,” Marvin Odum, the president of the company’s North American operations, said in an interview Wednesday.

“Now you’re starting to see some upstream reaction to where the prices are,” Odum said

Surging output and a mild winter pushed gas futures to a 10-year low in New York, according to data compiled by Bloomberg. U.S. gas production climbed 6.5 per cent to a record 28.6 trillion cubic feet in 2011, according to Energy Department data. Some of the largest gas producers in the U.S., including Chesapeake Corp., have announced plans to curtail gas production in response to low prices.

Shell may invest $3 billion to $5 billion in drilling shale fields, Odum said.

“We’re at the l ower end of that right now because of where natural gas prices are,” he said.

Shell wants to increase output in liquid-rich shale areas, which produce more oil or gas liquids such as propane, said Odum. The Hague-based company doesn’t plan to boost spending in 2012 unless gas prices rise or exploration prospects in more oil-rich formations prove successful, he said.

Gas for February delivery fell 5.4 cents, or 2.3 per cent, to $2.302 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Feb. 15, 2002. U.S. inventories were 45 per cent above the five-year average for the week, the biggest gap since June 2006.

With prices for the heating fuel so low, Shell wants to wrest more value from gas by using it to produce chemicals, other fuels or turning it into liquid form for potential export, Odum said.

Shell and other companies are evaluating plans to spend almost $50 billion or more on new plants in the U.S. that can turn gas into refined products such as kerosene, chemicals or a liquid form that can fuel trucks and other pieces of the transportation fleet.

The petrochemical industry may spend $30 billion to build U.S. factories that convert natural gas into plastics as shale drilling has made American production the cheapest outside the Middle East, Mark Lashier, an executive vice-president with Chevron Phillips Chemical Co., said Monday.

Shell is studying plans to build a plant in Appalachia.

It wasn’t so long ago that gas prices were still at a level where everybody was drilling almost as fast as you could . . . make it happen

MARVIN ODUM