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A Talisman Energy rig exploring for shale gas in the village of Szymkowo, in central Poland. (Czarek Sokolowski/Czarek Sokolowski/AP)
A Talisman Energy rig exploring for shale gas in the village of Szymkowo, in central Poland. (Czarek Sokolowski/Czarek Sokolowski/AP)

Low gas prices push Talisman to cut back on shale gas plays Add to ...

Talisman Energy Inc. is slashing development of shale gas, as the industry scales back production in the face of rock-bottom prices.

The energy company said on Tuesday it is cutting development of some of its most promising gas fields to a bare minimum and considering shutting in some production in northeastern British Columbia.

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Talisman is among a number of major gas producers, including Calgary’s Encana Corp. and Chesapeake Energy Corp. of Oklahoma City, which have slashed capital budgets and, in some cases, cut production in response to low gas prices.

Gas prices have slumped to 10-year lows because of a glut of production from shale formations, and a mild winter that kept seasonal demand low. With the end of winter, producers are now forced to inject the natural gas into underground storage. But this year, those facilities are already well stocked, and spot prices –trading at $1.50 per thousand cubic feet in Alberta – could fall even further.

Talisman is reducing its planned capital budget by $400-million (U.S.) to $3.6-billion this year, down from $4.5-billion in 2011. It said will spend only $200-million over the rest of the year to drill and develop natural gas plays – including those in the Marcellus and Montney fields – that don’t yield valuable liquids such as propane and butane.

As a result of low gas prices and operational problems, the company has seen its share price slump from $23.49 (Canadian) this time last year to $12.52, after losing 40 cents – or 3.1 per cent – on the Toronto exchange on Tuesday.

Talisman chief executive John Manzoni said he doesn’t expect natural gas prices to rebound significantly for at least a year, a prospect that will cut deeply into revenue of Canada’s gas-prone producers, and shift more capital to unconventional oil fields that are promising but untested.

The company did eke out a profit in the first quarter of the year on the strength of higher oil prices for its far-flung international operations, posting net income of $291-million (U.S.) versus a loss of $326-million in the first quarter of 2011.

While it slashes in areas that produce dry gas like the Marcellus in the U.S. Northeast, the Calgary-based company is maintaining its development spending in liquids-rich plays like the Eagle Ford in south Texas, and Alberta’s booming Duvernay field.

“Natural gas prices have remained below what we believe is a necessary long-term equilibrium price,” Mr. Manzoni said.

“However, with the injection season upon us, it’s quite possible this gets even worse before it gets better and we’ve adjusted our capital plans accordingly.”

Mr. Manzoni offered little hope that the depressed market will turn around soon, even if, as some analysts predict, a hot summer forces power utilities to burn more natural gas to power air conditioning.

Talisman is considering shutting in some production in the Monkman field in northeastern B.C., where it is looking to renegotiate a deal with Spectra Energy , which processes the gas.

“We’re looking at all options for Monkman,” said Paul Blakely, Talisman’s executive vice-president. “If we don’t get an equitable outcome in a low gas-price environment to keep some of that gas flowing, we have different options there to mothball parts of the field, or all of the field.”

In the prolific Marcellus field, Talisman will keep only one drilling rig operating this year, compared to 11 rigs in 2011. Mr. Manzoni said the Marcellus – where Talisman is one of the top producers – remains a valuable, long-term asset but it doesn’t make commercial sense to increase productions there at current prices.

However, the company will run 12 rigs in the Eagle Ford shale play – which is producing liquids-rich natural gas and oil – and has increased its targeted production from 60,000 barrels per day of oil equivalent to between 70,000 and 100,000 barrels per day.

The company is also facing challenges in its international operations, which tend to produce oil, while it has been focused on gas in North America.

In the Norwegian North Sea, Talisman has been struggling to complete a drilling platform for the Yme field, and on Tuesday, took a $248-million writedown on the project. Mr. Manzoni said the company will no longer factor Yme into its production forecast until it solves technical problems with the platform and can get it certified.

In Peru, the company drilled a dry hole and is reviewing its operations, which have come under pressure from local aboriginal communities who oppose drilling the area. A delegation of Peruvian natives appeared at Talisman’s annual meeting in Calgary on Tuesday to press their case.

But the company is reviewing its Peruvian properties and said it may sell them, not for political reasons but because they have not yielded hoped-for results.

Follow on Twitter: @smccarthy55

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