Natural-gas prices force down number of Marcellus drilling rigs

Drilling in the Marcellus Shale region has slowed substantially this year because of the drop in natural-gas prices, and it is unlikely to resume at the same pace anytime soon.

The number of drill rigs operating in the state is down 29 percent from its peak a year ago, according to Baker Hughes Inc., which tracks the industry nationwide. According to data from the Pennsylvania Department of Environmental Protection, the number of Marcellus Shale gas wells drilled in the first quarter declined 18 percent from the same period last year.

The decline in activity comes as no real surprise. Exploration companies have been signaling for more than a year that they planned to shift drilling equipment to areas where more profitable oil and natural-gas liquids are targeted. The warm winter, which reduced demand for natural gas and further depressed prices, only accelerated the exodus.

The slowdown is apparent in the northern reaches of Pennsylvania, where the most intensive drilling activity has occurred in the last three years. Bradford and Tioga Counties, which last year had the most new wells, now rank behind Lycoming County, home of Williamsport, according to an analysis by the Powell Shale Digest.

"You can clearly see there's a leveling off in traffic, both physical truck traffic and business development," said Thomas B. Murphy, codirector of the Penn State Marcellus Center for Outreach and Research. Commercial real estate that was tied up a year ago is now available, he said. Housing is more abundant. Residential rents are softening.

But the decline in exploration does not spell the end of the Marcellus Shale phenomenon, which exploded in 2008 as producers employed horizontal drilling techniques with hydraulic fracturing to unlock new reserves that had been locked in the deep shale formations.

"We're really talking about a long-term play," said Kathryn Z. Klaber, president of the Marcellus Shale Coalition, the industry trade group. "This relatively short-term drop in price does not change the overall viability and attractiveness of a play like the Marcellus."

Drilling has slowed mostly in the northern part of the state that produces "dry gas" — natural gas that does not contained coveted oil or liquids. But companies are continuing to build pipelines, compressor stations, and processing equipment to connect wells to the market.

"The rig count is coming down, but I see companies continuing to hire and continuing to invest in the infrastructure to bring product to market," said Klaber.

The slowdown is a function of market oversupply, a classic challenge that bedevils the oil and gas industry. When commodity prices rise, drilling activity tends to increase as producers chase higher profits. But production eventually overtakes market demand, which can also shift because of unusual weather or economic swings.

Even though they can't make money at current gas prices, some operators are continuing to drill new wells to secure expiring leases for mineral rights. If they start operations before the leases expire, the leases are "held by production" as long as activity continues.

Other operators are continuing to drill unprofitable new wells under the terms of deals they struck with foreign investors.

The result is that more wells have been drilled than are needed to keep the market supplied.

The dynamics of drilling are complicated because a well experiences a dramatic decline in production during its early years, so there is a constant need for new wells to come on line to replace older production. A shale-gas well can produce for decades, but much of the production is concentrated in the first two years.

"Gas wells in general decline at a very high rate," said Terry Engelder, a Penn State professor of geosciences. "All you have to do is lay rigs down, and production will gradually slow down to the point where there is a balance between production and demand and the price will rise back up."

But in the Marcellus, the time it takes for the market to catch up may be prolonged because so many wells have been drilled that are not yet in production.

About half the more than 5,000 wells drilled in the Marcellus are awaiting completion — hydraulic fracturing — or are shut in, awaiting construction of pipelines to carry away production, according to Penn State's estimates.

Some completed wells are shut off because the operators don't want to sell the natural gas at current prices, which are below $3 per thousand cubic feet.

"They're holding gas back in anticipation of a better price, and if that happens, they can turn the wells back on very quickly," said Engelder.

Availability of a lot of natural gas at the turn of a valve means that commodity prices are likely to remain stable for some time. "What that means is that there will be no price spikes up," said Engelder.

Some drill rigs from the dry-gas areas of Pennsylvania have moved out of state or to southwestern Pennsylvania, where the wells produce "wet gas" containing such liquid fuels as propane, butane and ethane that must be removed from the gas before it is sold as natural gas. Drilling is continuing in the wet-gas areas because the prices for the natural-gas liquids are high enough to make those wells profitable.

Range Resources Corp., which is concentrating about 75 percent of its drilling budget in the wet-gas areas, says it will continue drilling in the dry-gas areas of northern Pennsylvania until it secures its leases. "If the current commodity-price environment persists, you will see us cut our spending in the dry-gas areas," Ray N. Walker, chief operating officer, told investment analysts in April.

Officials from Cabot Oil and Gas Co., which has developed some of the state's most prolific wells in Susquehanna County, told analysts that it has five drill rigs operating in Pennsylvania but that it planned to wind activity down to three rigs in the second half of the year.