Marcellus shale drillers dramatically scale back well operations

File photo of a drilling rig in Avella working in the Marcellus shale.
File photo of a drilling rig in Avella working in the Marcellus shale.
Photo by Keith Hodan | Tribune-Review
| Sunday, March 6, 2016, 9:00 p.m.

Analysts for months have predicted that natural gas production from the Marcellus shale would tail off as prices tumbled to 16-year lows and drilling activity slowed.

Company executives are starting to agree.

“These production levels are simply not sustainable based on the reduced level of activity we see today,” Cabot Oil & Gas CEO Dan O. Dinges said during a recent earnings call with analysts.

The top shale gas producers in Appalachia over the past few weeks announced several billion dollars in combined capital spending cuts for 2016 that will slow — and for some outfits stop — the drilling of new wells.

The list of companies with no drilling rigs currently working the Marcellus includes top producer Chesapeake Energy, Southwestern Energy, Consol Energy and Anadarko Petroleum. Cabot and Rice Energy are down to one each, and Range Resources is running just three, down from 15 at the start of last year.

The total number of rigs running in Pennsylvania dropped to 16 on Friday, a third of the 47 rigs running this time last year and the lowest number since the shale boom began a decade ago, according to data from oilfield services company Baker Hughes.

Because of more efficient techniques, fewer rigs can accomplish more work. And some companies will continue to bring online an inventory of previously drilled but uncompleted wells.

That will allow a few companies to hit increased production goals for this year, but overall Marcellus production should level off or fall this year, according to the Energy Information Administration and others. The EIA said March production from the Marcellus would be 202 million cubic feet per day less than in February.

“I think by the end of the year that inventory will start to run out. You'll have a lot of companies with no rigs running,” said Steve Schlotterbeck, president of Downtown-based EQT Corp. “The rig count is unsustainably low at this point. Once we work through that inventory, I think we might see a fairly sharp response in supply and therefore prices.”

Huge production gains over the past two years fed the glut that sent benchmark prices falling below $1.70 per million British thermal units for the first time since 1999. A mild winter exacerbated the problem. U.S. natural gas consumption by residential customers in December reached a 31-year low, the EIA said last week. It expects the country to finish winter with a record amount of gas in storage.

Last summer, when prices fell below $1 in parts of Pennsylvania, analysts started saying companies would cut back production. Only recently has it started to happen.

Chesapeake, the biggest shale gas producer in the state, recently predicted companywide production for 2016 would be even with last year or 5 percent less. No. 2 producer Cabot dialed its expectation back to an increase of between 2 and 7 percent. Anadarko did not mention the Marcellus in its 2016 operations announcement.

Southwestern, which began last year with bold plans to increase production on newly acquired land, stopped drilling and is looking to sell assets.

“With this planned activity, production is expected to decline,” CEO Bill Way told analysts, saying, “we're in very different times from a commodity price perspective, and we believe this is the prudent path to take for now.”

Slowing production will eventually lead to higher prices once storage levels come down and exports increase.

“I'm pretty bullish for '17 and '18,” Schlotterbeck said. “There's a lot of reasons on both supply and demand once we get through this year.”

David Conti is the assistant business editor at the Tribune-Review. Reach him at 412-388-5802 or dconti@tribweb.com.

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