Chevron Backs Off Natural Gas Drilling in U.S.

(MoneyWatch)  The latest slew of quarterly earnings reports shows just what happens to the world's largest oil and gas producers when a global recession pushes down demand and causes crude prices to plummet. Profits are pinched and varying strategies are implemented in an effort to stanch the bleeding.

Chevron, which reported its second-quarter net income fell 71 percent to $1.75 billion from $5.98 billion in the same year-earlier period, certainly wasn't the only supermajor to experience some profit pain. Every major oil and gas producer, not to mention the refiners and oilfield services firms, are cutting costs. Some including Royal Dutch Shell will cut capital spending and may slash its workforce even further.

Chevron's quarterly report was notable because of its increase in oil production and its plans to halt all of its land-based drilling operations for natural gas in United States.

Decline rates on U.S. gas are pretty high and we're pulling the trigger, reducing the amount of investment in the arena and it's going to start responding and declining, said George Kirkland, executive vice president for global upstream and gas, during a conference call Friday.

Kirkland went on to mention Chevron's natural gas-development in the Piceance Basin and explained the company was going to shut down all drilling there. Chevron has about 35,000 acres in the Piceance Basin and has estimated 3 trillion cubic feet of natural gas are potentially recoverable from this project. The company began development drilling in 2007 and the full plan includes drilling more than 2,000 wells. Chevron completed an eight-mile pipeline last year to transport the gas to a nearby gathering system. At one time, Chevron had plans to have up to eight rigs running there, Kirkland said during the conference call. Chevron won't have any land rigs running in Piceance Basin or anywhere else in the lower 48 states for that matter.

I expect by the end of the year, we will not have a since gas land rig running ... With gas prices it doesn't make sense for us right now to be drilling those gas wells, Kirkland said.

Chevron's plans are just further evidence of how weak oil and gas demand is in the United States. And this makes me wonder what the nation's largest natural gas producer Chesapeake Energy will do later this year? Chesapeake is scheduled to report its second-quarter earnings after the close of trading on the New York Stock Exchange on Monday. The company's conference call is scheduled for Tuesday.

The Oklahoma city-based company's production rose 5 percent in the second quarter compared to the same period last year. Chesapeake is not curtailing production, but may do so again later this summer or fall as market conditions dictate, the company said in a statement released last month.

Chesapeake turned off some its wells and shut down about 13 percent of its production because of low prices earlier this year, as noted by the WSJ. Whether Chesapeake returns to this strategy as pipelines and storage facilities fill up remains to be seen.