June 27 (Bloomberg) -- U.S. natural-gas producers are drilling wells previously deemed too costly and resurrecting abandoned fields from Appalachia to the Rockies, spurred by the biggest rally in fuel prices in eight years.
Devon Energy Corp. and Range Resources Corp. are drilling horizontal wells that cost three times as much as traditional vertical shafts to unlock gas from rock formations that were unprofitable to exploit before this year's 75 percent gain by gas futures. The number of active U.S. gas rigs rose to a nine- month high last week, according to a survey by Baker Hughes Inc.
``As prices are better you want to drill more wells to get more production on line as quick as possible,'' said Larry Pinkston, chief executive officer at Unit Corp., a Tulsa, Oklahoma-based gas producer and drilling-rig operator. ``So we definitely are drilling more wells.''
The rise in gas futures in New York this year exceeded the 45 percent surge in oil and all commodities besides coal. U.S. gas demand probably will grow 4 percent this year, double the rate of new supply, said Roger Read, an analyst at Natixis Bleichroeder Inc. in Houston.
Gas gained the most since prices more than doubled in the first half of 2000. This month, futures rose above $13 per million British thermal units for the first time since 2005, when Hurricanes Katrina and Rita idled wells in the Gulf of Mexico. Read attributed the gain to ``unrelenting growth in electric power demand,'' lower-than-expected imports and increasing demand for alternatives to coal and oil.
Producer Shares Rise
An index of independent energy producers in the Standard & Poor's 500 climbed 29 percent this year, led by gains of more than 60 percent at Southwestern Energy Co. and Chesapeake Energy Corp. All 10 index members get most of their output from gas. Unit Corp., which isn't in the index, jumped 75 percent. The S&P index of integrated producers such as Exxon Mobil Corp., driven more by oil wells and refining, has fallen 1.7 percent.
New drilling projects will boost U.S. gas supplies in 2009 by 3.6 percent, the biggest increase since 1994, Read said. Gas is the most widely used U.S. furnace fuel and the third-largest source of power generation, according to the Energy Department.
The U.S. Bureau of Land Management, which oversees energy exploration on federal property, issued 7,124 permits to drill in the fiscal year ended Oct. 1, 5.7 percent more than fiscal 2006. Nine out of 10 of those permits were issued for projects in Wyoming, New Mexico, Utah and Colorado.
Drilling Accelerates
Range Resources, based in Fort Worth, Texas, increased its capital budget 40 percent this year to $1.27 billion to sink more wells in the Barnett Shale in Texas and the Marcellus Shale in Pennsylvania and West Virginia.
Range Resources, which gets most of its production from the Barnett Shale, expects to begin pumping commercial volumes of gas from the Marcellus in early 2009.
Drilling horizontal wells in deep, hard deposits such as the Barnett Shale costs about $3 million each, compared with $1 million to $1.5 million for a vertical well, Range Resources President Jeffrey Ventura said in a telephone interview.
Horizontal drilling is costlier because it requires more sophisticated rigs with more powerful motors, said Michael McMahon, managing director of New York-based leveraged buyout firm Pine Brook Road Partners LLC, which bankrolled three new gas producers in the past 15 months.
Horizontal Wells
Horizontal drilling is the only way to tap formations that otherwise won't give up their gas, Ventura said.
``There some areas of the Barnett Shale that didn't work at all as vertical developments but are very commercial as horizontals,'' Ventura said. ``Rock formations that people thought were non-prospective are now prospective.''
Unit Corp.'s Pinkston plans to drill at least 280 wells this year, up 11 percent from 2007. The program will let the company replace at least 150 percent of the gas and oil it pumps for the next several years, he said.
The company, which also owns 131 onshore rigs and a pipeline business, built two new rigs this year and plans to add another two in the fourth quarter, Pinkston said. Unit will decide in the next few weeks whether to order more rigs for 2009 delivery, he said.
Competition for drilling equipment and rig crews is escalating costs for producers, said Pine Brook's McMahon.
Pine Brook, founded in 2006 by former Warburg Pincus Vice Chairman Howard Newman, is stockpiling about 20 miles of pipe, enough to excavate six wells, in response to delivery delays from pipe makers because of soaring demand, McMahon said.
