Marcellus shale drillers start to come off sidelines as gas prices rebound
A rebound in natural gas prices and signs that a constrained market is loosening up are providing a glimmer of optimism for some top Marcellus shale producers.
In quarterly financial updates during the past week, executives outlined plans ranging from restarts of idled drilling programs by Consol and Southwestern Energy, a big ramp-up of shallower drilling by EQT Corp., and a more measured wait-and-see approach from Range Resources and Cabot Oil & Gas.
“We think it's prudent to be rational at this time until we see the infrastructure projects put in place,” Dan Dinges, CEO of Houston-based Cabot, told analysts Friday while discussing second-quarter financial results. Pennsylvania's No. 2 shale gas producer plans to maintain just one drilling rig in the Marcellus this year as it tries to time a larger production increase with construction of pipelines in its operating area in Susquehanna County.
Rising prices and a feeling that the worst is over are encouraging some producers. But analysts and some executives say delays in expanding the pipeline infrastructure and concerns about boosting production too quickly should temper the enthusiasm.
“I think we'll see producers much more cautious or conservative in their approach compared to 2012 or 2013,” when companies last came out of a low-price valley, said Eric Brooks, an energy analyst in Denver with Platts Analytics, a unit of S&P Global Platts.
A price collapse over the past two years — fed by a glut of supply and limited pipelines to take it to well-paying markets — prompted a swift slowdown in drilling across the Marcellus and Utica shales. The 182 shale wells drilled in the first six months of 2016 in Pennsylvania — the country's second-largest gas producer — was 57 percent below the same period last year and 72 percent below the 2014 pace. Companies such as Consol and Southwestern stopped drilling altogether, and Range reduced its number of drilling rigs from 15 at the beginning of last year to three now.
The slowdown, coinciding with a slide in shale oil drilling, capped production as demand from power plants and exports builds. National benchmark prices have risen to nearly $3 per million British thermal units after hitting 17-year lows of $1.64 in March.
“There are signs that later this year and into 2017, supply and demand will be more balanced and pricing could significantly improve,” said Jeff Ventura, CEO of Fort Worth-based Range Resources, echoing comments by fellow executives that the market is coming off a bottom.
“It's a good time to begin the process of restoring our pace of development,” said EQT CEO David Porges.
That process will look different at each producer, in part depending on their access to pipelines.
“They're looking for ways to get out of the region, where demand is picking up,” Brooks said.
Cecil-based Consol is starting up just two rigs that will drill 10 wells in strategic locations already served by pipelines.
“We were one of the first to drop all our rigs last year, and we're not rushing to ramp up capital with rising prices,” Consol CFO David Khani said about the company's cautious approach.
EQT will drill 30 more wells than it planned, but will tap a shallower and cheaper-to-exploit layer above the Marcellus. Those wells in the Upper Devonian layer won't increase overall spending or come online until next year, when the company expects pipelines to the Gulf Coast and Midwest to start up.
“They don't want to get too far over their skis. That speaks for much of the industry,” said David Holt, an equity analyst at S&P Global Market Intelligence.
EQT's Porges and others warned that production gains could outpace demand and pipeline capacities, sending the region back into a glut that pushes prices lower.
“We are a bit wary of more of the same that got us into this lower-price environment,” said Brooks, who noted that many pipelines once expected to come online next year won't be ready until at least 2018.
Range officials are watching those pipeline plans closely with goals to move up to 80 percent of gas produced in the Marcellus out of the region.
The company is maintaining its complement of three drilling rigs but has a plan to ramp up quickly and cheaply as demand increases. It has identified 200 existing well pads that have room and permits for additional wells. Drilling there can cut in half the time it takes to get gas flowing — while ruffling fewer feather among neighbors — compared with starting a fresh pad.
“We'll be able to react more quickly,” said Dennis Degner, a vice president at Range, who estimated such wells cost about $700,000 less. “It helps streamline it from start to finish.”
David Conti is the assistant business editor at the Tribune-Review. Reach him at 412-388-5802 or firstname.lastname@example.org.