Jan 10, 2015 8 min read

Within the past several years, shale drillers across the country were able to accomplish what most people would have thought impossible just a decade ago.

Producers using hydraulic fracturing made the United States one of the world’s largest producers of oil and natural gas.

But the “shale gale,” which delivered lower gasoline and natural gas prices for consumers, was a beacon for jobs in a moribund employment environment, prompted manufacturers to bring operations back to the United States and was instrumental in helping to lower the country’s trade deficit, is facing some headwinds of its own. Overproduction, lack of pipeline infrastructure and continuing downward pressure on prices from OPEC on oil are the primary culprits.

The lower gasoline prices caused by OPEC’s decision to continue to pump oil into a world market with scant demand is benefitting American consumers, but may be crimping some production plans of domestic oil and natural gas shale drillers.

Some in Pennsylvania’s natural gas industry believe the drilling effort that has produced abundance here may have made the industry a victim of its own success, but a natural gas economist said last week she doesn’t believe lower oil prices will have much of an effect on drillers’ plans to continue their work.

While many natural gas producers working in the Marcellus and Utica shales haven’t announced capital expenditure plans for the new year – Chevron and Consol Energy’s CNX Gas division will provide theirs later this month – those who have plans to continue drilling with little or no curtailment.

In mid-December, Range Resources, one of the largest drillers in the Marcellus, said it would spend 18 percent less on drilling in the new year, but at the same time said it expects production to rise between 20 and 25 percent over last year, attributing the projected gain to efficiencies in its drilling practices.

The company is committing $1.196 billion, or 92 percent of its overall spending, to the Marcellus this year. That’s down 0.09 percent or $100 million from what Range spent last year in Pennsylvania, when its capital expenditures here were $1.322 billion, or 87 percent of its total budget.

Pittsburgh-based EQT also announced a slight increase in spending for the new year.

On Tuesday, during the American Petroleum Institute’s “State of American Energy 2015” address in Washington, D.C., Chief Executive Officer Jack Gerard acknowledged to reporters that in the case of shale oil drilling, some producers, particularly those who are highly leveraged, may have to curtail production, while those who are in strong financial positions will probably keep drilling.

Erica Bowman, chief economist for America’s Natural Gas Alliance, agreed that the same dynamic affecting oil shale drillers would hold true for those in the shale gas industry,

But “there’s not as much impact (of falling oil prices) directly on drilling for natural gas,” she said in a telephone interview with the Observer-Reporter, citing several market-driven reasons why natural gas is more insulated from oil prices.

Much of it has to do with the diverse domestic markets that natural gas serves.

According to Bowman, the segments include home and commercial heating, where pricing is subject to weather; industrial, including petrochemical (a market for natural gas liquids) and manufacturing, such as steel and glass that use large amounts natural gas in their production processes; and power generation, where gas competes with coal – not oil – as fuel for power plants. Drillers also produce liquefied natural gas, which they want to export.

Of those segments, Bowman said, LNG is the one most likely to feel the impact of oil-linked contracts in a steep decline, “because (foreign) importers are getting a break on pricing.”

But Bowman said she expects the government to approve LNG export terminal projects over time. On Tuesday, U.S. Sens. John Barrasso, R-Wyoming, and Martin Heinrich, D-New Mexico, introduced legislation that would speed up the approval process for exports of LNG to countries that do not have free trade agreements with the U.S. It specifically requires the Secretary of Energy to make a decision on any LNG export application within 45 days after the environmental review document for the project is published.

There’s no denying that natural gas liquids, which include propane, ethane and butane, are also in large surplus, due to a driller focus on that sector. According to the Energy Information Administration, by 2016, production of NGLs from the Marcellus and Utica shales is forecast to reach at least 650,000 barrels per day, an all-time high. The glut, blamed on pipeline takeaway infrastructure shortages, caused prices to fall by 40 percent between October and mid-December, with the exception of ethane, which was down 23 percent for the last three months of 2014.

As for ethane, which is of high value to the domestic petrochemical and plastics industries, Bowman sees its surplus eventually being absorbed, particularly if ethane crackers are built in the region. For now, producers are shipping ethane outside of the region, including some to Canadian and overseas markets.

There is anecdotal evidence that some parts of the shale gas industry are fraying because of low oil prices.

• On Monday, Antero Resources said it will lay off more than 250 contract land brokers in West Virginia. The company said NGLs have been affected by a drop in crude oil prices, which prompted it to reevaluate how much capital it commits to land acquisition. Antero said it wants to focus its capital on drilling, and that the layoffs wouldn’t affect Antero employees.

• On Tuesday, U.S. Steel said it will lay off 750 employees from two plants that make tubular steel, which is used in oil and gas drilling. The company said it will temporarily shut down a plant in Lorain, Ohio, in March, and also will lay off 142 employees who work at a plant in Houston. The company said the moves were in response to falling oil prices and unfair competition from foreign companies.

• On Wednesday, Norway’s Statoil said it has sold part of its stake in the Southern Marcellus Shale strata to Southwestern Energy, again citing a slump in oil prices.

David Spigelmyer, president of the Marcellus Shale Coalition, a trade group that represents 260 members that include drillers and their supply chain partners working in Pennsylvania’s Marcellus Shale, acknowledged Thursday that some members have recently reduced their capital spending plans for the new year in response to falling oil prices.

Spigelmyer added that the current market conditions call for caution, given the state’s elevated position as a natural gas industry leader.

“Pennsylvania is now a global player as an energy supplier,” he said,

In December, MSC, along with the Pennsylvania Independent Oil and Gas Association and the Pennsylvania chapter of the American Petroleum Institute, voiced their opposition to Gov.-elect Tom Wolf’s proposal for a 5 percent severance tax.

Spigelmyer and the others stated that imposing a severance on shale gas production would reduce investment in the industry here. Operators already pay an impact fee on each well drilled in the state.

The industry leaders also stated that while Henry Hub prices for natural gas have been in the $3 to $4 range, Pennsylvania producers realize $2 less because of the lack of infrastructure here.

Spigelmyer reiterated the industry’s stance Thursday.

“We have to get this right,” he said, adding that the industry’s goal is to provide natural gas to regenerate manufacturing and other industrial development in the state to create more jobs and generate more tax revenue from the growth.

In the meantime, the force of the shale gale has continued to produce benefits that are evident everywhere from the gas pump to the country’s falling trade deficit.

Because of OPEC’s response to the U.S. producers’ climbing production rates, oil prices have made gasoline prices the lowest since 2009, the height of the recession. At the same time, the abundance of shale gas has lowered natural gas home heating prices in the region to about half of what they were before the shale boom of the past several years.

On Tuesday, the Commerce Department reported that the U.S. trade deficit fell in November to the lowest level in 11 months as crude oil imports dropped to a 20-year low. The deficit narrowed to $39 billion in November, down 7.7 percent from a revised October deficit of $42.2 billion. Imports dropped even faster, falling 2.2 percent to $235.4 billion, primarily a reflection of foreign oil declines.

As for the oil’s continued slide, Bowman said it remains to be seen what the future bodes for other oil-producing countries like Russia and Iraq, which are struggling from the price slide led by Saudi Arabia.

“It will be interesting to see what falls out of this because there’s a lot of pressure on them to figure this out,” Bowman said.