Shale Gas Production Will Keep Natural Gas Prices in the $9-$11 Range

My thought is that the natuarl gas market is bifurcating.

That shale plays and tight sand plays are ones that can be profitable at probably an $8 NYMEX price. But what I think we see in many plays across the country that are what you would call conventional, those plays are at an increasingly large cost disadvantage to the shale plays. There are -- you think about our plays in the Barnett, Fayetteville, Haynesville, et cetera, we're able to drive costs down over time as we drill dozens, hundreds, even thousands of wells. If you look at companies that are out trying to find five and 10 well fields you just don't have the opportunity to drive your costs down.

You're always inventing kind of yourself as -- through these smaller targets. So I think if gas prices were to stay below $9 Henry Hub for some period of time I think that the shale plays probably continue to move forward, but I think you will see a lot of rigs drop out of what you would call conventional drilling. And another hought, people get fixated on what our Henry Hub price is.

Remember that basis differentials in the mid-continent in the month of July are about $1.30 to $1.40 per Mcf, when you start talking about compression and things like that $8 gas these days means probably something close to $6 at the wellhead. So there's kind of been a quiet or silent creep of about a dollar into basis differentials over the past 12 months on average that I think a lot of investors probably don't fully appreciate, that what companies get at the wellhead is kind of less and less related to what you read in the headlines at Henry Hub.

So I -- we think gas prices will stay in this $9 to $11 range. There will be times, like in July when -- there will be times when they're below it and of course the weather will matter a lot as well. But we're pretty confident that much below
nine you would see a drop off in drilling activity, particularly among the conventional drilling, then those pretty aggressive 35% to 40% first year declines are going to kick in and rebalance the market.

I saw something the other day where some analyst had come up with production in 2010 was going to be up by something like 8 Bcf to 10 Bcf a day and gas prices were going to be $6.25. That's that kind of analysis, I think, can only come at the dangerous intersection of Excel and PowerPoint. It can't happen in reality.