Houston (Platts)--11Aug2010/615 pm EDT/2215 GMT

Natural gas rig counts will begin to fall in the middle of 2011 if prices continue to hover around $5/MMBtu, the president and CEO of Devon Energy said Wednesday. "Something isn't working right now, either the price has to come up or costs have to come down for rig increases to be sustainable," said John Richels, at a speech at the Petroleum Club in Houston. In an interview with Platts after the speech, Richels said the increase in rig counts is tied to producers trying to keep leases at unconventional plays. Many of the leases were purchased in 2008 and are two- and three-year deals. Once many of the leases are renewed, the rig count should start to decline, which should start occurring in the middle of next year, he said. In his speech, Richels said that the industry is facing an unprecedented economic reality -- $5 gas in both spot and forwards markets. "The contango is out of the forwards market," he said. "We are going to have to deal with some very difficult economics in this industry." Some of the liquids-rich plays work with prices at this level, Richels said. However, he added, most drilling activity is not in liquids-rich plays. For most gas production, prices would have to reach $6-$7 to sustain the rig increases, Richels said. Richels also addressed Devon's move towards liquids, part of a trend of independent producers in the industry. "We've never really wanted to be just a natural gas company or just an oil company," he said. "We always thought that having some kind of a balance was a better thing in the long run." Currently, Devon's reserves are 40% oil and condensates and 60% gas, a split that the company would like to sustain in the future, he said. In addition, Richels said, Devon's sale of foreign assets and offshore production in the Gulf of Mexico has allowed it to become "essentially debt free" and have "a lot of flexibility in how we deploy our capitol." Currently, Devon is focusing heavily on liquids and is keeping stakes in key North American plays, he said. FRACKING CHEMICALS About 80% of the company's capital expenditure budget is going to oil and condensate plays or plays enhanced by natural gas liquids, Richels said. In addition, he said that Devon will continue to focus on unconventional shale plays which have been "a huge revolution in this industry." Devon has 4,300-4,400 wells in the Barnett Shale play and has leased large amounts of acreage at other up and coming shales including the Avalon shale primarily in New Mexico, the Cana/Woodford Shale in Oklahoma and the Wolfberry Shale in Texas. Richels also said the company's sale of offshore and foreign assets has yielded about $8 billion in after-tax profits, compared to the $4.5 billion-$7.5 billion it expected. A few sales were still pending, he cautioned. In addition, Richels told Platts that Devon was not opposed to releasing data on the chemicals used in hydraulic fracturing fluid, but does not think the federal government should be involved, adding another layer of unnecessary regulation. US House Energy and Commerce Committee Chairman Henry Waxman has sent letters to 10 producers, including Devon, looking for data on the chemicals used in hydraulic fracturing fluid, policies about handling water after drilling and other information. Richels said that state agencies have done a good job in regulating fracking operations. "We don't see the utility of the EPA involved at another level," he said. -- Eunice Bridges, eunice_bridges@platts.com Similar stories appear in Gas Daily. See more information at http://www.platts.com/Products.aspx?xmlFile=gasdaily.xml