Marcellus Shale Firms Rethink Plans Due to Low Gas Prices
Pittsburgh Business Times
4 February 2011
By Anya Litvak
The price-fueled slowdown in Marcellus Shale natural gas drilling has
finally arrived.
After years of ramping up operations within the Marcellus, some of the
region’s leading operators are looking to scale back development plans
as the price of natural gas remains low.
The pullback won’t be drastic. In fact, some companies will drill more
wells this year than in 2010. But the stubbornly low gas prices are
taking some steam out of the ramp up.
“We are not happy with gas prices,” said Brandon Elliott, vice
president of investor relations at CONSOL Energy Inc., a Cecil-based
coal and gas producer that is scaling back its planned rig count after
seeing income from gas operations, including both Marcellus development
and its coalbed methane program, fall by 86 percent year-over-year in
the fourth quarter of 2010.
It is only when gas prices rise that CONSOL will increase rigs, Elliott
said.
Pricing Pressures
Natural gas prices are at $4.53 per thousand cubic feet, down from a
record high of more than $12 per mcf, according to the Energy
Information Administration. A look at NYMEX futures on Feb. 3 showed
prices are expected to stay below $5 per mcf for most of the next two
years, and creep slowly above $6 only by the end of 2015.
Partly responsible for the drop has been the rapid development of
shales in the U.S. over the past several years, which has oversupplied
the market for gas, analysts say. The recession also has played its
part.
Oklahoma-based Chesapeake Energy Corp., one of the most active
developers of the Marcellus, echoed virtually the same message as
CONSOL when it announced that unless the price of natural gas gets
above $6 per mcf, the company will drill only on properties whose
leases are set to expire or where a joint venture contract is in place
and it is bound to a development schedule by contract.
Chesapeake said it is “rapidly shifting from 90 percent gas to a more
balanced oil/gas production mix of 75/25 percent in 2012.” Next year,
the company plans to further decrease its capital spending for natural
gas drilling, with a 30 percent allocation.
Talisman Energy USA Inc., the Cranberry-based subsidiary of a Canadian
company that burst onto the scene in Pennsylvania with a $1 billion
spending commitment last year, also is pulling back in 2011.
Its capital budget for the Marcellus is $800 million, and the company
plans to reduce its rig count from 12 in 2010 to nine in 2011.
“Capital discipline continues to be a priority, and we will be very
mindful of North American gas prices as we move through the year,” John
Manzoni, Talisman’s president and CEO, announced earlier this month.
“In North America, our emphasis will shift to liquids, and we will
reduce gas-directed spending by 35 percent.”
He noted that the new level of drilling will continue to generate
profit at gas prices around $4 per mcf. But wet plays — those filed
with liquid gas components such as ethane, butane and propane — can
fetch a higher price for their product. Those like Talisman and
Chesapeake, who have the option, increasingly are reallocating their
resources to liquid shale development while gas prices are low.
Production Predicted to Grow
Yet, even as they tame development plans, many of the natural gas
companies with operations in the Marcellus project production increases.
Despite a scaled-back capital plan, Talisman still anticipates doubling
average daily natural gas production this year.
CONSOL’s 2011 capital budget calls for increased spending on Marcellus
development — from $160 million last year to $333 million in 2011 — and
increased production, despite reducing the number of drilling rigs. It
had planned to operate five rigs this year, but instead plans to run
three part of the year before adding a fourth.
And Range Resources, the most active driller in southwestern
Pennsylvania, plans to double production in 2011 even though it may not
increase drilling, said Matt Pitzarella, a spokesman for the company.
That may be a reflection of a more honed, expert drilling strategy in
this relatively new natural gas field, Pitzarella said.
Although the company has yet to finalize its capital plan for 2011,
“it’s more about drilling smaller pads, with two to four wells” versus
the 10 or 12 wells that can be drilled from a single, large pad, which
take about a year to complete and bring online, he
said.
The smaller spurts are “good for a number of reasons,” Pitzarella said.
“It allows you to grow your production more consistently, rather than
seeing spikes in production. It (also) allows you to hold more acreage
faster.”
“Obviously, gas prices are hugely impactful,” he said.
Anya Litvak covers energy, transportation, utilities, gaming and
accounting for the Pittsburgh Business Times.
Contact her at alitvak@bizjournals.com or (412) 208-3824.