Pennsylvania

Energy. Environment. Economy.

Drilling downturn hits Marcellus Shale industry hard

rig

Joe Ulrich/ WITF

Pennsylvania's Marcellus Shale industry has been struggling in the face of low commodity prices.

The sound of humming drill rigs has been tapering off lately. It’s been happening for a while, but this year, the industry is going through a particularly rough patch. Drillers are laying off workers and cutting spending in the face of low natural gas prices.

 

One prime example is Cabot Oil and Gas. Earlier this month, the company announced plans to cut its 2016 capital budget by 58 percent, compared to last year. It’s also scaling back to operate just one rig. That’s a pretty big deal, according to Stephen Beck, who analyzes U.S. oil and gas plays for IHS.

“The noteworthy thing about Cabot is that it’s located in some of the best areas of the Marcellus in Northeast Pennsylvania,” he says. “The wells in these areas are some of the most economic wells in the Marcellus.”

Other major companies have also announced cuts this year. Southwestern Energy laid off over nearly 40 percent workforce—including about 200 jobs in Appalachia. Range Resources recently cut 55 jobs and Chesapeake Energy saw its stock plummet as it fended off bankruptcy rumors after hiring a restructuring firm.

The downturn has rippled through related industries too. Clayton Bubeck is with the Lancaster-based engineering firm, Rettew. He says the Marcellus boom was a shot in the arm just at the right time in 2008. Despite the Great Recession, Rettew was able to open new offices and their workforce more than doubled to nearly 500 people.

But suddenly, nearly all their business was oil and gas.

“We really didn’t understand what that cyclical nature was going to be maybe as well as we should have,” says Bubeck.

In 2014 Rettew decided it needed to diversify in order to insulate itself from the booms and busts of the industry. Today, the company has just under 400 employees and does about half its business in the energy sector overall—including some growing renewable industries.

“That’s just the way oil and gas is. It’s a commodity-based industry. It’s capitalism. When they’re making money, they’re doing work,” says Bubeck. “And when the prices are down, they retract. They do it to themselves. They knew the more they drilled, the more product they’d put on the market, and that drove the price down.”

Marcellus gas production peaked last year then started to slide. There are now just 19 rigs running in Pennsylvania.

“It’s really difficult for them to justify keeping all the rigs out there,” says Lynn Westfall, director of the Office of Energy Markets and Financial Analysis for the U.S Energy Information Administration.

Since production declines rapidly from wells, companies have to keep drilling new ones to keep up the pace.

“That’s why production is going down,” says Westfall. “The new wells aren’t making up for the loss from the old wells. The other problem is logistics. There’s just not enough pipeline capacity to get it out.”

And less gas means less work. The most recent figures from the state Department of Labor from the second quarter of 2015 show a loss of more than 2,262 oil and gas jobs, compared to the same period the previous year.

The slump is also hurting state coffers. Royalties from drilling on Pennsylvania forest land have dropped sharply this year, and gas companies will pay less in impact fees—which have become an important source of revenue for local governments.

But as an analyst watching this all play out, Beck says it’s key to remember one thing.

“The important thing is the industry does go through these boom and bust cycles as everyone knows and the industry will get through this low price period as well.”

Governor Tom Wolf is still advocating for a new severance tax on production. Last year, his proposal didn’t get enough legislative support. This year, his administration expects his new plan would bring in $217.8 million dollars—a fraction of the billion dollars they’d hoped for last year. Republican lawmakers, who have long opposed such a levy, are starting to signal they may be open to enacting one this time around.

 

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Comments

  • Greywackie

    When all of this is added together it means a loss of annual state tax revenue of $93,806,600 Million! This comes on the heels of the Pennsylvania Environmental Quality Board’s recent approval of regulations that, by numbers included in PADEP’s own regulatory analysis, will annually cost the oil and gas industry $100 Million.

    I came up with that number as follows:

    Pennsylvania oil and gas jobs paid an average of $82,974 in 2012. Losing 2,262 of these jobs means an annual loss of $5,762,000 in state income tax revenue. In addition, presuming that 1/2 of each workers salary was used on taxable purchases, the there is an annual loss of $5,630,600 in sales tax revenue.

    Cabot’s capital budget cuts means a loss of $203 million dollars being spent in Pennsylvania. Assuming 1/3 of that would have been spent on taxable purchases then that is another $4,060,000 of annual sales tax revenue lost.

    On top of that is the loss of more than $31 million in state property royalty revenue and a loss of between $15 Million and $34 Million in impact fees. Private royalty owner will also be seeing a loss of over 50%. In 2010, Pennsylvania landowners received $500 Million in royalty payments. If the state, as landowner, received $60 Million, then the other $440 Million went to private owners. A 50% loss reduces royalty income by $220 Million. The reduction in state income tax revenue by these lost royalties is $6,754,000 and, using the same assumptions used for workers, of 1/2 being spent on taxable purchases then the loss in state sales tax revenue is $6,600,000.

    Given that government spending is unlikely to be reduced, and that, if the anti-fossil fuel lobby is successful then the ‘downturn’ referenced in this article will be permanent, then more taxes on the rest of us are inevitable. Since that is goal of the anti-’s then perhaps imposing taxes income generated by the billions held by ‘charitable’ foundations like the Heinz Foundation or the William Penn Foundation.
    And perhaps, having their agents in the news media and academia pay their fair share?

  • crystalpoint

    When the truth is known by the “Wolf” administration on why there are real cuts in new gas well drilling! A lot has to do with “Wolf’s” and the EPA’s new regulations placed on the industry! Most of which, is the additional costs of these new regulations!related to the outlandish environmental regulations, now imposed on the industry whether you know it or not!

    Go ahead and “cry” Mr. Wolf, you deserve it!

    Ray P. Smith, Sr.

    • Michael J

      Are you completely oblivious to the oversupply? It has nothing to do with EPA regulations. It’s the price that producers can get for their product. $2.28/mcf last month. Last year January it was $2.99/mcf. That’s a 24% drop. Go ahead and make you political statement, but don’t think for a second that is the main reason the oil and gas companies are suffering. Here in the oil industry – we’re looking at what we can sell oil and gas for. EPA’s new regulations have almost zero impact relative to price at wellhead or hub. If you’re too dumb to look what the oil and gas companies are talking about (price deterioration is what is being spoken about in earnings conference calls, not EPA regulations), your opinion has zero credibility.

    • Green People’s Media

      No, that’s not true. The reality is not these conservative talking points that crystalpoint is saying. The reality is the geophysics of these shall gas and oil deposits. See the topmost story today on peakoilbarrel.com for example. The Bakken oil field is going into the same steady, terminal decline in production as this Marcellus formation which produces mostly gas.

      The rapid overproduction just assured that the rise, peak, and “Seneca cliff” fall-off in production would be very very rapid, that is all.

      Best wishes to everyone in Pennsylvania. Hopefully some day your environmental may return to envrionmental health, but this will take many generations to come.

      GPM.

      • disqus dean

        Go have another bong hit.

  • August Braun

    The usual trash from Stateimpact. Anyone who ever thought that nat gas would not be cyclical is delusional and badly misinformed. It is tied directly to something called the business cycle. Additionally, drillers have become extremely efficient at coaxing the gas from the ground.

  • Nita Shafer

    Coal learned about the Boom – Bust Cycle long ago. Coal Prices would go up, everyone and their Brother would mine coal and flood the market then coal prices fell with the glut and Mines were idled or closed. The Gas People and their Investors are just now learning this lesson. Flood the market with natty gas and guess what ? Yep, prices collapse and you are in a bust.

  • Jeff Share

    what I would like to know is how many jobs in Pennsylvania have actually been created by the shale boom? most of the producers seem to have brought crews in from elsewhere.

    • Louis Russo

      You are dead on. No restaurant or hotel jobs were created. No construction jobs either. It was only out of state oil workers that came to PA, damaged the land and left with their pockets full.

  • Louis Russo

    I guess the only thing worse than fracking is no fracking.

  • Green People’s Media

    A fellow name of “Disqus Dean” commented (via email) “Go have another bong hit.”

    I always take comments like this as a sign that the commenter has such a command of the peer-reviewed evidence covering a story such as this, that they’re so confident they can “win the conversation”–they don’t even need to provide this evidence. Wow so confidence.

    Collapse of shale gas production has begun:
    http://peakoilbarrel.com/collapse-of-shale-gas-production-has-begun/#more-11455

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