"E&P companies ... are going to drill until the market hits them over the head and says 'stop.' And the market is about to [do that]," Pursell told attendees at Platts' Oil and Gas Shale Developer Conference in Houston.

How long drilling at low prices can last is "a function of how long the E&P community wants to hurt itself," Pursell said.

According to Pursell, gas prices need to reach at least $6/MMBtu, compared with their current level of around $4/MMBtu, in order provide a 20% return on investment for most plays, including shale plays.

Events have transpired, however, to keep production high despite the attendant oversupply situation.

After bottoming out towards the end of 2009, rig count "recovered because prompt-month prices weren't strong, but the forward curve was," Pursell explained.

"In the fall [of 2009] you could hedge forward in the low $6/MMBtu and a lot of people did."

With many E&P companies heavily invested in shale production, they have been compelled to continue drilling in order to maintain their lease positions despite low prices, but that is a trend that can't continue, Pursell said.

"A lot of those leases start to expire [in 2011]. So there will be a desire to drill this year ... but the rubber hits the road next year," he said.

Forward curves have also corrected themselves since fall 2009, offering less hedging possibilities for producers.

"A lot of companies that [are] shaley are hedged at about 60% of their production in the low $6s/MMBtu [for 2010]. But next year only 10% of their production is hedged," Pursell said, adding that if forward curves remain low throughout the rest of 2010, "the market will wall and rig count goes away."

That loss of rig count is desperately needed by the US gas market, Pursell said, if prices are going to recover but demand is not likely to grow to match supply.

"The problem is [shale plays] are going to grow to producing 14 Bcf/d over a four-year period -- demand isn't growing that fast," he said.

--Joshua Starnes, joshua_starnes@platts.com