As workers prepare to get a rig up and running to tap into shale deep under Canadian County in November, one might not guess that natural gas prices are sitting at uncomfortably low levels with a surplus that isn’t going away any time soon.

Despite those factors, Devon Energy Corp. and other companies are taking a slow and steady approach to ramping up production around the country and across the state.

Devon has been a major player in southeastern Oklahoma’s Woodford Shale for half a decade. In the last few years, the company began to explore central and western Oklahoma, and now is hard at work at Cana – a part of the Woodford Shale – in what is one of the newest shale fields in the country, in Canadian, Blaine and Caddo counties. With a lease on 109,000 net acres, it has six rigs operating in the Cana field, and expects to have two additional rigs in the next six months.

“So far, we are very, very pleased with our results out there,” says Brad Foster, Devon’s senior vice president of the central division, which oversees Cana and the Barnett Shale in north Texas.

Likewise, in western Oklahoma and the Texas panhandle, Chesapeake Energy Corp. is at work in the Greater Granite Wash. In the Oklahoma portion, called the Colony Granite Wash, the company is the largest leaseholder with 60,000 net acres, and is the most active driller.

Jim Gipson, Chesapeake spokesman, says the Wash will be the company’s primary focus in its Oklahoma operations in 2010, specifically in Washita and Custer counties.

But low natural gas prices are hurting the industry – and Oklahoma.

DRILLED DOWN
Bruce Bell, chairman emeritus of Mid-Continent Oil and Gas Assoc. of Oklahoma, says over the last year, drilling activity and rig counts are down, and current prices can’t support the level of activity needed, or address the current surplus.

“That work has been cut way back because the price of natural gas in Oklahoma is really less than you can sustain making money,” Bell says, pointing to prices seen at the wellhead as low as $2 per Mcf, the oil and gas measurement for 1,000 cubic feet. “Even to break even, you’ve got to have around $4 an Mcf.”

The recession also has created a surplus. Bell estimates there is 3.8 trillion cubic feet of gas in storage ready for the winter, while only about 2.5 trillion cubic feet will be used.

“We’ve got a huge surplus to work through,” he says. “We’re going to have a lot left over in the spring, and that’s going to continue to depress prices until we being to work through this surplus.”

But when prices recover, Oklahoma could experience another shale boom similar to 2008.

“Everybody keeps attempting to figure out exactly when we are going to see the break-even point, where we are no longer producing more gas than we’re using,” Bell says. “Projections started early on, that this was going to happen in late 2009, but it hasn’t happened yet.”

He says Oklahoma still has the potential to be a leader in natural gas production when the economy improves, and it makes fiscal sense to ramp up exploration and production here. The Energy Information Administration ranks the state third in the nation for natural gas production.

“There’s a lot of drilling to be done, and lots of natural gas in Oklahoma to be produced,” Bell says.

BETTER DAYS
In anticipation of better days ahead, Devon is building a $120 million gas plant west of OKC, set for completion in early 2011. It will be the company’s second gas plant in-state.

That investment builds on its confidence in the Cana field, where it will have 3,100 risked locations, accounting for 6 trillion cubic feet equivalent, equivalent to about 1 billion barrels of oil.

Last November, Devon announced it planned to sell all of its Gulf and international assets to focus its growth and development on onshore assets, which could focus more efforts on the Cana field and future exploration in Oklahoma.

“There is no doubt that we continue to look for opportunities in Oklahoma,” Foster says. “There’s an awful lot more of these opportunities as technology continues to evolve, and new technology is discovered and employed in the oil field.”