Falling oil prices bring slowdown in shale drilling

The slowdown in domestic oil drilling is spilling over into the Marcellus Shale natural-gas region.

Several large drilling companies have announced plans to reduce 2015 capital-spending plans in Appalachia in response to low energy prices. Some producers and service companies have already announced layoffs.

"There's a tightening of capital," said David J. Spigelmyer, president of the Marcellus Shale Coalition, the industry trade group. "Cap-ex [capital expenditure] programs have declined fairly significantly here in the first quarter. I think that's going to continue for a while."

Though Marcellus Shale producers mainly extract natural gas, which is priced independently of oil, they are not immune to the downward pressure on world oil prices.

Producers in the "wet gas" areas of Western Pennsylvania, West Virginia, and eastern Ohio have announced the biggest reductions in drilling plans. They chiefly target natural-gas liquids such as propane, butane, and ethane, whose prices move largely in conjunction with oil markets, which have collapsed.

Range Resources Corp. announced that it will cut its capital spending for 2015 to $870 million, from $1.3 billion. Range spends 95 percent of its budget in the Marcellus.

Producers in the dry-gas areas of northern Pennsylvania also are feeling the pinch, even though natural-gas prices are influenced more by domestic demand than worldwide oil markets.

Spot-market natural-gas prices have fallen in recent months nationwide because of abundant supplies and the mild winter. Gas prices are even lower at several key Marcellus trading hubs, where local growth in gas supply has outpaced construction of new pipelines to deliver the fuel to market.

While natural gas traded Thursday at $2.95 per thousand cubic feet at the Henry Hub, the Louisiana distribution point whose price is the national benchmark, the same commodity was priced at $1.13 at the Leidy Hub in northern Pennsylvania, according to SNL Financial, the business-intelligence firm.

Marcellus gas producers typically break even when gas is priced at $2.50 to $3 per thousand cubic feet, said Scott Mitchell, a supply-chain analyst in Houston with Wood Mackenzie, an energy-research firm.

Few drillers are sinking new wells in the face of depressed local gas prices, which have dropped as low as 58 cents per thousand cubic feet, said Lou D'Amico, president and executive director of the Pennsylvania Independent Oil and Gas Association.

"You're not going to bring too many new wells online at 58 cents," he said.

The slowdown is likely to affect employment throughout the supply chain, from producers of steel well casings to hydraulic-fracturing crews. The American Association of Professional Landmen last week canceled an April conference in Pittsburgh because of a lack of interest. Nobody is writing new leases.

Oil and gas prices have historically experienced booms and busts - relatively small imbalances of energy supply and demand can cause huge swings up or down in price. Some Pennsylvania producers hoped the shale-gas boom would end the volatility.

"I used to tell people when the shale play broke that this was going to end the cycles," D'Amico said. "But I was wrong. We're kind of shortsighted as an industry."

The outlook is unlikely to improve quickly, gas-industry officials said. Pennsylvania producers have drilled hundreds of wells that are awaiting connections to local gathering lines. And plans for new interstate pipelines to deliver the gas to consumers are facing growing resistance from increasingly sophisticated local opposition groups.

"It will probably take five to eight years to build out the infrastructure, if we're successful getting those projects built," Spigelmyer said.

The Marcellus gas industry already experienced a significant slowdown in 2012, when gas prices plunged and exploration companies redeployed drill rigs to more profitable oil regions in Ohio, Texas, and North Dakota.

There were 137 drill rigs operating in Pennsylvania at the peak in 2011. Today, there are 51.

With the recent fall in oil prices, many producers are idling drill rigs rather than redeploying them. Some, such as Cabot Oil & Gas Co., a prolific dry-gas producer in northern Pennsylvania, have not yet announced their 2015 capital-spending plans.

"All of this is under review at Cabot right now," company spokesman George Stark said.

One consolation is that the price of drill-rig rentals and hydraulic-fracturing contractors is going down. Wood Mackenzie's Mitchell said the reduced cost of drill crews might cut a new well's price by 20 percent, lowering the break-even point.

Mitchell called the Marcellus a "high performance play" that is still "very attractive" relative to other natural-gas fields.

Already, the industry is citing the slowdown to support its calls for the Wolf administration to rethink its advocacy of a 5 percent severance tax on Marcellus Shale production.

Wolf, who was sworn in last week, won election promising to impose a severance tax to pay for education costs. The industry says higher taxes will erode margins and drive capital out of the state.

Source: Philly.com