Pennsylvania

Energy. Environment. Economy.

Marcellus output flat amid falling prices, slack demand, pipeline shortage

Workers install a new shale gas pipeline in Zelienople, Pa. The slow down in production is due in part, to a lack of pipeline infrastructure.

Keith Srakocic / AP Photo

Workers install a new shale gas pipeline in Zelienople, Pa. The slow down in production is due in part, to a lack of pipeline infrastructure in the state.

Natural gas production from Pennsylvania’s Marcellus and Utica shales showed little change in 2015 as energy companies deferred expansion plans amid falling prices, sluggish demand growth, and a continuing shortage of pipelines to take the state’s abundant gas to market.

Data from the state’s Department of Environmental Protection show unconventional gas production from the two fields totaled 3.89 billion cubic feet in October, the latest month for which data are available, slightly down from the 3.90 billion cubic feet reported for January of last year.

In the Marcellus, which accounts for the vast majority of the production, the stagnant picture follows a 30 percent increase in 2014 – when prices were about twice what they are now — to about 4 trillion cubic feet, or some 16 percent of total U.S. annual consumption.

The latest stagnation in output reflects slumping market prices which make it harder for energy companies to invest in new wells. Natural gas futures on the New York Mercantile exchange closed at $2.33 per million BTUs on Jan. 4, up $1.06 on a week earlier, as the late arrival of colder weather finally boosted demand, but down 66 cents compared with a year earlier, according to the U.S. Energy Information Administration.

In mid-December, the NYMEX priced dropped to $1.75, its lowest since 1999. The EIA said the natural gas spot price at the Henry Hub, a national benchmark in Louisiana, dropped to an average of $2.61 in 2015, the lowest annual average since 1999.

“Low prices deter new production,” said Kevin Book, an analyst at ClearView Energy Partners, a research company in Washington, DC. “One of the things that is first to suffer is your highest-cost, least-productive well.”

Book said Marcellus output growth has suffered because of the widely publicized shortage of pipelines, and because demand from electricity generators and consumers has shown little growth.

Electric generators’ use of gas surged in the last several years as energy companies retired coal-fired plants and began to comply with tighter air-quality regulations at state and federal levels. But the switching from coal to gas is now likely to slow until the start of the 2020s, Book said.

“There are still some gains from fuel switching to be had, but a lot of it has already been played out,” Book said. “The next wave of switching isn’t likely to come until the next decade.”

Cabot Oil and Gas public relations officer George Stark with a drill rig worker outside of the "dog house." The company owns some of the most profitable wells in the Marcellus.

Susan Phillips / StateImpact Pennsylvania

Cabot Oil and Gas public relations officer George Stark with a drill rig worker outside of the "dog house," on a rig in 2012 when gas drilling was booming.

At the consumer level, demand has been depressed by a winter that was unusually mild until early January, Book said.

The combination of sluggish demand and plentiful supply exacerbate an imbalance between the quantity of gas in the Marcellus and the ability to supply it to markets, he said.

“There’s more gas to be had in the Marcellus than there is pipeline capacity to convey it to market,” he said. “There is also more gas to be had in the Marcellus than there is accessible market right now.”

Whether gas companies can make money in the Marcellus with prices at current levels depends on the capital structure of each company, Book said, noting that some are losing money with the price at $2 while others could still break even if the price dropped to $1.

Despite the slack demand currently, Pennsylvania’s abundant gas resources are likely to find a big market overseas in the future when the U.S. begins to export liquefied natural gas to lucrative foreign markets from a series of U.S. export terminals that are currently under construction, Book said.

While some companies have cut their rig counts or deferred expansion, others are combining their operations to cope with the low-price environment. In early December, National Fuel Gas Company, the parent company of Seneca Resources, announced an agreement with IOG CRV Marcellus, a unit of the energy investment firm IOG Capital, to jointly develop up to 80 Marcellus wells in north-central Pennsylvania.

National Fuel chief executive Ronald Tanski said the agreement would allow the company to pursue its strategy of developing Appalachia acreage and building pipelines despite the drop in revenue caused by lower prices.

A Seneca Resources well site in Tioga County during boom times in 2012.

Susan Phillips / StateImpact Pennsylvania

A Seneca Resources well site in Tioga County during boom times in 2012.

“During this period of lower commodity prices, where we are experiencing decreased cash flow in the upstream portion of our business, the drilling joint development agreement we announced today helps us move forward with our strategy,” Tanski said in a statement on Dec. 2. He said the agreement “significantly reduces” National Fuel’s capital requirements for its upstream operations.

State officials declined to comment on market conditions.

Neil Shader, a spokesman for the DEP – whose published data are subject to change as individual companies submit unaudited figures — declined to say why production was flat in 2015 but said a shortage of pipelines is contributing to the problem.

“The lack of pipeline infrastructure has been cited by the industry as a major impediment that has stranded gas and depressed market prices,” Shader said.

He said that Gov. Tom Wolf’s Pipeline Infrastructure Task Force, which is due to submit its recommendations on Pennsylvania’s massive pipeline buildout in February, is designed to identify best practices that will allow the gas to get to market while protecting landowners, citizens and the environment.

DEP Secretary John Quigley has estimated that Pennsylvania could have as many as 30,000 miles of pipeline in the next 20 years. Current efforts to increase pipeline capacity include Sunoco Logistics’ planned Mariner East 2 pipeline which would take natural gas liquids 350 miles from the Marcellus Shale in southwestern Pennsylvania to a terminal at Marcus Hook on the Pennsylvania/Delaware border.

Comments

  • Bill.Marston

    A citizen’s request of Industry & DEP et al:

    Why struggle with “impediments” when a simpler AND fairer way exists – to advance jobs, tax revenues, clean air regulations & compliance costs and virtually eliminate the legal expenditures by state, individuals, industry (which truly benefit only the already rich lawyers, right?)?

    Why not bypass such regulatory and public / environmental issues by shifting tax law, land use & mineral rights, acquiring Rights of Way / easements, risks of leakages & fires, et al?

    Just work to facilitate the growth of safe, quick, non-invasive, neighbor-friendly rooftop grid-tied solar power.
    • Such a universally available energy production enterprise requires no land disruption at all.
    • it doesn’t create stressful short-lived boomtowns.
    • it doesn’t pollute or even risk polluting water or air.
    • it doesn’t add load or stress to infrastructure (the same wires carry the same loads – in broad terms).
    • it reduces electric utilities’ peak demand.
    • get it?

    Please swallow your pride, traditions, whatever is getting you in the way of moving to the post-carbon global economic fabric. Please!

    • https://www.facebook.com/app_scoped_user_id/1522786448/ Scott Cannon

      I agree whole heartedly Bill. Unfortunately, the decisions our state lawmakers are making is based on greed and selfishness, not for the benefit of it’s citizens.

    • bill

      Rooftop solar is fine for residential needs but thus far commercial and industrial needs can’t be met economically or physically. For instance, a bakery needing 80,000 kwh simply doesn’t have enough rooftop space even if the costs came down.

  • Bill.Marston

    P.S. of course we all know my preceding Comment was not directly about the (dying) fossil-fuel mining & distribution industry. My Comment was about reframing the state agencies’ mission! DEP acts on everything environmentally related that there is in Pennsylvania. The matter of oil’s impact on our state’s environmental status is actually minimal, isn’t it? Surely transportation pollutants and regulation of the distribution of fuels for it affect Pennsylvania’s environment to a far larger degree. Therefore, I write to urge our state agencies & industries to focus instead on what really matters – a healthier environment in our state and around our world.

  • Gary

    Blame it on pipelines, but demand is currently filled with production quantities. We don’t need any more pipelines until exports take off. No one will invest long term for $1. Even if some producers can make money at $1, what landowners will sign up to give their resources away for such pittance.

  • Gary

    This article was based on Oct data. You will find production has dropped much more when they report for December. Low prices have killed off investment in the Marcellus. Permits and wells drilled are down about 50% from 2014 levels. Last year there was a huge push in Fall drilling. That allowed additional supply to enter inventory this year. That jump in drilling did not occur this Fall, and one should see a big drop in production within the next year, if the price remains low.

About StateImpact

StateImpact seeks to inform and engage local communities with broadcast and online news focused on how state government decisions affect your lives.
Learn More »

Economy
Education