Drilling Activity is Linked to the Price of Natural Gas

I suppose the headline of this post may have you saying, “It doesn’t take a genius to figure that out.” But how, exactly, does the spot price for natural gas relate to drilling activity? Can we quantify it? Let’s try.

In a recent article on an investment blog called Energy & Capital, author Keith Kohl offers some excellent insights into the natural gas marketplace from the perspective of those interested in investing in it. And along the way, he makes some observations well worth reading for landowners in the Marcellus. I encourage you to read the entire article.

Here are just a few insights from his article:

[N]atural gas has been treading water. After deteriorating more than 70% since July records, prices have fallen below $4/Mcf this week. That’s a level many people thought they’d never see. And to make matters worse, I’ve been hearing more and more people calling for natural gas to plummet below $2/Mcf and stay in that range for several months.

Developing…shale sources will be extremely difficult (or even nonexistent) if natural gas prices fall below $2/Mcf for a sustained period. The depreciation of natural gas prices since July has already caused companies across the board to slash exploration and production spending.

Much like the oil industry, not a week passes that I don’t see another project being delayed or canceled. Furthermore, the number of active drilling rigs has been in serious decline. The latest numbers from Baker Hughes Inc. reported that the number of exploration rigs has dropped nearly 45%. And if prices continue to remain this low, you can bet we’ll see even more rigs going silent.

That means production is headed one way—much lower.

But his longer term prediction is not gloomy. He believes prices and production will start to improve in 2010 when an improving economy, more demand and less supply kick in. In the article he also offers his opinion on liquefied natural gas (LNG) imports, and his thoughts on which companies to invest in (EOG Resources is one of them). Read the whole article! It’s well worth it.

Based on Mr. Kohl’s views and other sources, this is Marcellus Drilling News’ take: If natural gas prices stay at or above $4/Mcf ($4 per thousand cubic feet), drilling will continue and slowly expand. That price level is just above break even for energy companies. If the price goes higher at $5-$6/Mcf, happy days are here again. If the price drops to $2/Mcf and stays there, production all but stops because energy companies will lose money.

Read the full article: The Inevitable Crunch in Natural Gas Supply… and How to Prepare Your Portfolio

Downstate New Yorkers Demand Total Ban on Drilling in Upstate’s Marcellus Shale

Marcellus Drilling News sees a growing chorus of voices from New York City who believe the city’s water supply, 90% of which comes from the Catskill/Delaware watershed area in Upstate, is directly threatened by drilling activity in the Marcellus. And they are becoming vocal in their demands to stop the drilling before it even starts.

Some demand no drilling only in the watershed region itself (take note landowners in those counties). Others want a blanket ban throughout the state. From a recent article in The Villager covering a forum held in New York City:

Worried about an imminent threat to the Catskill/Delaware watershed, which supplies New York City with 90 percent of its water, Community Board 2 [C.B. 2] last week voted unanimously to demand a ban on drilling for natural gas in New York State.

And this:

“We can’t let the bad economy and people wanting to cash in on natural gas provoke wholesale drilling,” said Queens Councilmember James Gennaro at a March 18 forum held by the C.B. 2 Environmental Committee at Judson Church. “We can’t be the generation that loses New York City’s water supply to the lure of natural gas,” said Gennaro, who is a trained geologist.

Gennaro is the sponsor of City Council legislation calling on the state Legislature, the state Department of Environmental Conservation and Governor Paterson to prohibit drilling for natural gas within the watershed’s boundaries in Delaware, Greene, Ulster and Sullivan Counties.

The article quotes a parade of officials and heads of environmental groups in NYC that are opposed to any and all drilling in New York. Will the growing chorus of protests make a difference? Perhaps. Landowners need to make their voices heard just as loudly to counter the din that will come from Downstate. Contact Governor Paterson and your state representatives in the Assembly and Senate.

An aside: No one is in favor of contaminating the water supply, least of all our own! The issue of what chemicals are used and in what concentrations is an important one and must be dealt with fairly. Energy companies would do well to diffuse the issue by revealing at least general information about the chemicals they use. However, a blanket ban on all drilling is nonsensical. The problem is, there’s a lot of nonsensical things that happen in our great state. So we must be vigilant to protect our rights as landowners. Let’s not let “the mob” (little “m”) dictate what we can and cannot do with our land. We still have a (precious) few rights left, among them the right to own property. We can protect the water supply and still drill safely in the Marcellus. Let’s figure it out.

Read the full article: No fracking way! C.B. 2 forum warns about water