These are tough times for natural gas drillers in Pennsylvania, the center of the Marcellus Shale. A persistent glut of natural gas has led to a price free-fall below $2 per Mcf with little hope for a speedy rebound.
In 2013, I was among several energy writers included in a state-sponsored tour where we visited several businesses benefiting from Marcellus development as well as with energy industry executives, university representatives and Pennsylvania government officials eager to tout their breath-taking gas discovery.
The Marcellus was still in its infancy and expectations were of an unlimited future that would place the growing shale play among the world leaders for natural gas production for years, if not decades.
The Appalachian Basin supplies over a third of the nation’s natural gas supply, nearly 20% from Pennsylvania where 2008 production was 180 Bcf vs. 6.9 Tcf in 2019. A state report released Feb. 27 noted that total gas production in Pennsylvania grew by 7.6% in the fourth quarter of 2019 compared to the same period in 2018 – the lowest growth rate in over two years.
A native Pennsylvanian, I’m keenly interested in news about my home state. It was with great interest during the media briefing in our Pittsburgh hotel that I asked an official of Chevron Corp., which had recently bought out a large independent gas producer in the Marcellus, how long Chevron expected to remain there.
“Oh, about 60 years,” he said. Take off the zero and you get the sum total of Chevron’s tenure in the Marcellus, give or take a year or two
Chevron on Dec. 12 said it would write down $10-11 billion of U.S. onshore assets, including $6.5 billion from its Marcellus/Utica holdings. It has hired Barclays to find buyers for over 500 wells on about 900,000 acres of leases.
State officials remain stunned from the California-based oil major’s decision to shut down its Marcellus/Utica operations and cut over 300 jobs, starting April 6.
Still, Chevron is the largest, but not the only producer to feel the sting of the Marcellus slowdown that has forced several large independents to watch their stock prices hover at or near historic lows.
So, is the Marcellus in a state of steady decline, or is this yet another classic example of the energy industry’s boom-or-bust cycles? David J. Spigelmyer, president of the Marcellus Shale Coalition since its founding in 2008, told Hart Energy that the news is not all bad.
“Capital is certainly constrained in the upstream space; that said, there is a mountain of capital being spent in building infrastructure and in some of the downstream opportunities made possible by abundant, affordable natural gas and natural gas liquids,” he said.
The rig count in the basin, including West Virginia, Pennsylvania and Ohio, is slightly over 40, with 24 in Pennsylvania. One year earlier, the rig count was 46.
Spigelmyer cited the market glut and the inability to get gas into New England as major issues. One reason production is increasing, albeit at a lower percentage, is that some drillers such as EQT Corp. are using longer laterals which require fewer rigs.
“It’s not only a problem for our operators to deliver gas there, but a real problem for consumers that get stuck with the volatility in pricing and short supply because of the lack of infrastructure,” Spigelmyer explained. “Last winter, for instance, consumers paid at times more than $90/MMBtu. Every utility in Pennsylvania delivered commodity to consumers in the commonwealth at less than $5/MMBtu.
“What an enormous disparity,” he continued. “When I said all consumers in the commonwealth are enjoying that opportunity, they certainly do. Our commodity prices in Pennsylvania are anywhere from 56%-76% less than they were in the winter of 2008.”
Lack of Infrastructure
Spigelmyer said some areas of Pennsylvania lack sufficient takeaway capacity, leading to some of the deepest discounts in Nymex pricing in the U.S. Midweek pricing in January averaged $1.74, usually a time when discounts are thinner because of demand. That’s not been the case during this relatively mild winter.
“Storage hasn’t been hit in any significant way, and takeaway capacity is still fairly limited to get gas to some consuming regions of the country, specifically the Northeast and East Coast markets,” he said.
Chevron’s decision to leave wasn’t a total surprise to him, Spigelmyer said.
“I think Chevron would share with you that they are still a fairly expensive producer in the Appalachian Basin and that others have greater efficiencies to produce natural gas,” he said. “Every company has different metrics on how they compete internally for capital. Based upon their acreage as compared to some others, they hadn’t been performing at a high level, based on their management’s comments. Others could produce that acreage in a more profitable fashion.”
How are the other producers reacting?
“I think they’re focused on making sure they have their A-game on at times that natural gas has such depressed pricing,” Spigelmyer said. “We also need to have our A game on from a regulatory perspective that we can be attractive compared to other shale plays across the country and attract capital here.”
“Nor should we overtax the industry or over-regulate, especially at a time when folks have choices on where their capital goes because it impacts jobs,” he added, a reference to Gov. Tom Wolf’s proposal to charge gas producers with a severance tax.
While upstream operators have softened capital projections because of the economic constraints in the play, Spigelmyer has seen a different response from downstream operators who profit from low commodity prices.
“I haven’t seen anyone on the downstream side that said they are going to build a facility back away because from their perspective, there is likely no better time than now because the economics are strong, given the reduced prices for the commodities driving the plants,” he said.
The Big Upside: New Manufacturing Jobs
Spigelmyer pointed out that across Pennsylvania, the building trades are at-near full employment.
Shell’s multibillion-dollar ethane cracker under construction west of Pittsburgh employs 6,000 workers and is expected to rise to 7,200 this summer at the second-largest construction site in America. Major power-generation facilities fed by natural gas have over 750 workers on a single site.
Spigelmyer said there are 20 new power plants across Pennsylvania, representing $13 billion of capital investment the last five years.
“For four decades, U.S. Steel has been an obituary written for western Pennsylvania,” he said. “Last year they announced they are going to put over $1 billion into one of their facilities in that region… a bit of a birth announcement for U.S. Steel.”
“We have seen extraordinary job growth across not only Pennsylvania but across the entire region [including Ohio and West Virginia],” he continued. “We know the ethane and liquids supply that is being produced like in the Shell facility can be duplicated in other areas. This creates a whole new opportunity for future manufacturing for our region.”
Outlook for 2020 and Beyond
Spigelmyer, who has worked in the energy industry for 38 years, compares the Marcellus to baseball.
“We’re very much in the early innings of a long inning game of natural gas development,” he said. “Folks are becoming more educated, we use natural gas in so many ways: heating, cooking, drying clothes, heating water. It’s used in making steel, glass, plastic, chemicals, fertilizer, pharmaceuticals. Power generation using natural gas has allowed us to reduce sulfur dioxide and nitrogen oxide particulates, CO₂ and greenhouse gas emissions.”
“Every energy source available to the public has some cost,” he continued. “Some are talking about renewables in the future, but even those have extraordinary environmental costs when you look at battery technology that is required for their development. Windmills and solar panels have an environmental cost and footprint as well as being very interruptible sources.”
“I’m not gunning at renewables, but natural gas is an extraordinary partner to meet baseload demand because it comes on quickly,” he said. “Folks running for office need to look at the full scale of environmental positives and challenges with every single source that we need to use for power generation. As we evaluate all sources of energy, let’s put all of those issues on the table.”
Speculation has been growing that an LNG export hub may eventually be built at the port of Philadelphia, which would be the furthest inland port to play an international role in LNG development.
Spigelmyer described it as a “robust opportunity” for onshore investments as well, including small LNG facilities in northern Pennsylvania that could ship by rail or truck to get around constrained areas like New York that are blocked from construction.
“Certainly, LNG export is a critical market for us as well as the investments being made on the Gulf Coast and East Coast,” he said. “It’s a niche LNG market.”
Economics Favor Liquids
William Arnold, a business professor at Rice University in Houston and former energy executive, argued it’s considerably easier to do business in Texas than in the Northeast.
“The key issue is that the Marcellus is primarily a gas play, but the economics favor liquids,” he told Hart Energy. “This has been going on for some time but is exacerbated by the recent extremely low gas prices.”
“In the Permian, you have two impacts: the development of new pipelines [a much easier permitting process in Texas], and the flaring of gas that may currently have a negative economic value,” he continued. “We have export markets by pipeline to Mexico and an increasing number of LNG export facilities, so there are commercial opportunities in the future.”
“Compounding this,” he said, “has been the political stance in Massachusetts and New York to block pipelines from the Marcellus to those demand centers. The NGOs (non-governmental organizations) that support this seem to have a wider agenda to deny pipelines in order to shut in production at the source, and ultimately leave no alternative but renewables.”
“The exception to the gloom and doom may be projects such as the Shell/Bechtel project in Pennsylvania. It seems to be on a solid basis in view of the diverse products they will produce and markets they will serve,” Arnold said.
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