Northeast PA Starting to Feel the Dry Gas Drilling Slowdown

The decision by Chesapeake Energy and other drillers to reduce drilling in dry gas (methane only) areas and instead concentrate on wet gas (natural gas liquids) areas is already having an impact on Pennsylvania’s northeastern counties where drilling last year was extremely active. Rig counts are going down, and with them, the amount of drilling activity goes down. It ultimately impacts the local economy in those areas, as noted in a recent Scranton Times Tribune article.

In January, one of the [northeast PA] region’s largest gas drillers, Chesapeake Energy Corp., announced it would reduce its rig count in the region. Its rig count will go from 75 to 24, drilling fewer new wells and reducing the flow from existing wells. Other companies made similar announcements.

Bradford County has already seen active rigs decline from 27 to 20 as of Feb. 10 as rock-bottom natural-gas prices prodded the company to drive for more lucrative fuels from the earth, such as "wet gas" from western Pennsylvania or oil from other parts of the country, according to Houston, Texas-based Baker Hughes.

Economic activity is tied closely to rig count, said Anthony J. Ventello, executive director of the Progress Authority, which handles economic development for Bradford and Susquehanna counties.

"As goes the rig count, so goes the economy," Mr. Ventello said, noting that a rig has an economic impact not unlike that of an itinerant factory. "As an industry, natural gas is not going away, but we are in a slowdown that will have an effect on the economy."

"The pace won’t return to what it was until we see stronger natural gas prices and that’s not happening anytime soon," said Steven Schork, of the Schork Report, an energy markets newsletter. "We are in a long-term structural down market that’s going to last at least two more years."(1)

Why is it happening? Simple economics. Too much supply and not enough demand equal record low gas prices.

Throughout the country, more domestic natural gas resources were developed – not just the Marcellus Shale, but also the Haynesville, the Utica, the Barnett, and others which combined hold a century’s worth of natural gas. As those wells were brought on line, the system was loaded with gas, driving down the price.

Pennsylvania Marcellus Shale wells reached a production milestone of 1 trillion cubic feet last year. Data released last week showed 2,210 of the commonwealth’s shale wells were tied into pipelines and producing gas – a 35 percent increase in the number of producing wells since the first half of 2011 that helped account for a 40 percent jump in production.

Add to that an unseasonably warm winter that has kept natural gas storage levels high, a surplus promising to cushion the price of gas through 2012.

As recently as last week, natural gas futures were trading at $2.69 per million BTU, less than half the price it was as recently as September 2008 and far below the $5 to $7 level that many say is the average price required in North America to produce shale gas economically.(1)

It also means landowners who were anticipating royalty checks will have to wait.

For people with natural gas leases but no well or royalty money, the slowdown means the extra cash will have to wait, said Trevor Walczak, of Greenfield Twp., president of the Pennsylvania chapter of the National Association of Royalty Owners. The announcement put a damper on the excitement and expectation of leaseholders.

"For them, this means more waiting," he said. "Some people were counting on it."

The natural gas companies say with wellhead prices so low, royalty owners may benefit from the slowdown in the long term. Royalties are based on a percentage of the well head price, so higher priced gas translates into higher royalty payments.

"We will be essentially storing or deferring their production until they can be sold into a higher-priced market," Chesapeake’s [Brian] Grove said. "Chesapeake’s financial interests are completely aligned with royalty owners."

While some people may prefer to wait, others have been counting on the royalty income, Mr. Walczak said.

"Some people are happy to sit on the resources, others don’t care what the price is, the royalties can’t come soon enough," he said.(1)

Is all lost? Was it really just an economic mirage? Would we have been better off never having started down this road? Of course not. The current slowdown may go on for a year or two, but no one can predict the future of natural gas prices. Natural gas prices will bounce back in time, and when they do, so will drilling in dry gas areas.

Trying to predict the future price of natural gas — which, unlike oil, is less beholden to global conditions — can be a futile exercise, said Kajal Lahiri, a University at Albany economics professor.

"People are saying natural gas prices are falling, but these are very temporal things," Lahiri said. "Two years down the road you could see it shooting up. It’s a function of a lot of different factors, like demand."(2)

(1)The Scranton Times Tribune (Feb 19, 2012) – As gas drilling boom slows, worry sets in

(2)Binghamton Press & Sun-Bulletin (Feb 19, 2012) – Has New York missed the hydrofracking boom?