Oil, gas drilling slumps, except for Marcellus

| Saturday, Jan. 9, 2010

Drilling of oil and natural gas wells and permits issued tumbled in 2009 across Pennsylvania as prices for both fuels plummeted, according to state Department of Environmental Protection figures.

Total wells drilled would have been even lower but for a surge in drilling for natural gas in the Marcellus Shale formation a mile underground, state figures show.

In Western Pennsylvania, permits issued dropped by nearly one quarter, and the total number of wells drilled fell by nearly half, figures show. In Allegheny, Armstrong, Beaver, Butler, Fayette, Greene, Indiana, Washington and Westmoreland counties, Marcellus Shale wells drilled jumped by more than three times 2008's total.

Industry experts and major natural gas players say shallow-well drilling will be flat in 2010, but look for growing drilling activity in the Marcellus formation.

The Marcellus is a layer typically 5,000 to 6,000 feet below the surface, running from the southern portion of New York, through much of Pennsylvania, into eastern Ohio and through most of West Virginia into Kentucky. Some estimates say it contains enough natural gas to supply all U.S. needs for two decades.

"Drilling activity in the Marcellus Shale last year was just remarkable, with a sharp increase in activity despite the natural gas price being down," said DEP Secretary John Hanger, in an interview.

Hanger said he expects Marcellus-related drilling and permitting to double in 2010.

According to data from the U.S. Energy Information Administration, the price for natural gas at the point where pipeline companies deliver the product to companies like Dominion Peoples, Equitable or Columbia, ranged in 2008 between $9.19 per thousand cubic feet, and $13.68 per thousand cubic feet.

Through the first 10 months of 2009, natural gas prices ranged between $6.60 per thousand cubic feet in September to $9.23 per thousand cubic feet last January.

The economic downturn slammed energy demand, driving oil prices to a 2009 low of about $34 a barrel in February, compared to about $80 at yearend.

Drilling activity was directly impacted by the price of natural gas, experts said.

"Overall drilling was down due to the decline in natural gas prices and the decline in demand," said Kent F. Moors, director of the Energy Policy Research Group at Duquesne University's Graduate Policy Center. "With conventional wells, as price goes down, the profit margin likewise goes down."

Low volume natural gas wells are more price sensitive than the high-production Marcellus wells, experts said. Plus, Marcellus drillers continue to wring costs out of the drilling process.

"Companies drilling right now in the state's Marcellus can make money when natural gas prices are above about $3.60 per thousand cubic feet," Moors said.

Atlas Natural Resources LLC of Moon, one of the most active drillers in Pennsylvania, saw its total wells drilled last year decrease by nearly 100 percent, to 147 from 286 in 2008.

But its Marcellus wells drilled jumped more than 700 percent, to 114 wells from just 16 in 2008.

"We really are focused on shale drilling, using horizontal drilling techniques," said Atlas spokesman Brian Begley. "We're always cognizant of natural gas prices, but we are very well hedged, which allows for much better clarity of results and stable cash flows for our investors."

Marcellus drilling consumes large quantities of water, and questions concerning what companies do with water returned to the surface during the process are getting increasing scrutiny. Hanger said he's been pleased thus far with the overall cooperation drillers have given the state. And he's encouraged by the companies moving toward using more wastewater to continue the drilling process.

"The industry is moving toward using more wastewater, of treating the water and injecting it underground," Hanger said. "The companies are welcome in the state as long as they respect our environmental requirements."

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