UPDATE 1-U.S. natural gas drilling rig count hits 13-year low

Fri Jul 27, 2012 11:10pm IST

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* Gas-directed rig count falls to lowest since July 1999

* Horizontal rig count drops for third straight week

* Oil drilling rigs gain slightly, still below 25-year high

NEW YORK, July 27 (Reuters) - The number of rigs drilling for natural gas in the United States dropped this week to the lowest level in 13 years as producers continued to slow dry gas drilling operations and focus instead on more profitable oil and gas liquids wells.

The gas-directed rig count posted its ninth drop in the last 10 weeks, sliding by 13 this week to 505, the lowest since late July 1999 when there were 498 rigs operating, data from oil services firm Baker Hughes showed on Friday.

The gas rig count is down 46 percent since peaking last year at 936 in October. The nine-month-long drop has fed expectations that producers were getting serious about stemming the flood of record gas supplies.

Baker Hughes earlier this month said it expects the U.S. natural gas rig count to stand at 488 by the end of this year, down 321 from 2011 levels.

The company also reported that horizontal rigs, the type often used to extract oil or gas from shale, fell for the third straight week, dropping 13 to 1,151. But the horizontal count is down just 3.5 percent from the record high of 1,193 set in May.

Dry gas drilling has become uneconomical at current prices, but drillers have moved rigs to more lucrative shale oil and shale gas liquid plays which still produce plenty of associated dry gas that ends up in the market after processing.

Rising output from shale has made it difficult to slow overall dry gas production, which is still flowing near record high levels.

Oil-directed horizontal rigs now represent about 70 percent of the total horizontal count, up from just 53 percent at the start of the year and 43 percent one year ago.

OIL DRILLING EDGES UP SLIGHTLY

U.S. energy companies added two oil-focused rigs this week bringing the total count to 1,416.

The oil rig count hit a 25-year high of 1,427 two weeks ago before 13 rigs were brought offline last week.

Baker Hughes president Martin Craighead said last week that the drilling boom in North Dakota's Bakken shale, which has so far led new U.S. domestic oil production, may be curtailed if oil prices drop below $80 a barrel.

The rig count in North Dakota fell this week by 5 to 193. Major Bakken producers like Continental Resources attribute the drop to their move to replace older rigs with newer versions.

Houston-based Baker Hughes expects the oil rig count to stand at 1,430 by year end, up about 300 from a year earlier.

GAS PRODUCTION STILL NEAR RECORD HIGHS

While gross U.S. gas production has slowed slightly from January's record peak, output is still flowing at near all-time highs despite the sharp decline in dry gas drilling.

The Energy Information Administration expects U.S. marketed as production in 2012 to rise by 4.2 percent to a record 68.98 billion cubic feet per day, easily beating last year's record of 66.22 bcf daily.

Front-month natural gas futures on the New York Mercantile Exchange, which were down 7.1 cents at $3.034 per mmBtu just before the Baker Hughes data came out at 1 p.m. EDT, edged up to about $3.05 after the report.

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