EQT's shift from Kentucky's Huron shale could have ripple effect
By Kim Leonard and Timothy Puko,
Published: Saturday, Jan. 21, 2012
EQT Corp. said Friday it will stop drilling natural gas wells indefinitely in the Huron shale in Kentucky because of decade-low prices, a move that might signal a major course correction for shale drillers, experts said.
The Downtown-based gas producer announced the decision in a securities filing, but there was no immediate indication that other Huron gas producers might follow suit. EQT has 5,000 producing wells in Kentucky and 3,500 miles of gathering lines, on about 2.7 million acres of reserves. The company will offer 39 employees new positions in Pennsylvania or West Virginia, spokeswoman Natalie Cox said.
"There's been a clear desire to up the value by moving more toward oily plays -- and this is just one more step in that," said Jeremy Boak, director of the Center for Oil Shale Technology and Research at the Colorado School of Mines in Golden, Colo.
With natural gas prices falling to a decade low earlier this week, all producers will have to reexamine the economics of every deep-shale drilling area, said Pete Stark, vice president for industry relations at IHS Inc., an energy research and consulting firm in suburban Denver. A drilling slowdown is likely, with investment focused on formations like the western Marcellus and Utica shales that produce more valuable liquid fuels, including ethane and propane, along with natural gas, several experts said.
"It's not a wholesale slaughter, but for those companies that may only have dry gas and may not have favorable contracts, they may just have to make adjustments," Stark said.
EQT's Cox said she had no information on why the company is pulling back in the Huron play, and not the Marcellus regions that include most of Western Pennsylvania. EQT said the move is "consistent with its determination to live within its means financially."
The ramp-up of shale gas drilling in recent years and other factors such as milder-than-usual weather for much of this winter have driven down prices. Natural gas for February delivery rose 2.1 cents yesterday to settle at $2.343 per million British thermal units on the New York Mercantile Exchange, the first increase in a week.
The Marcellus in Southwest Pennsylvania, which yields gas and liquid hydrocarbons, is the most profitable shale basin in the country, according to a 2012 outlook report released on Jan. 12 by Houston-based Tudor, Pickering, Holt & Co. Drillers can make a 10 percent return on drilling here even with prices nearly as low as $1 per million Btu, it said.
The report ranked the Marcellus in northeast Pennsylvania sixth of 28 basins in the country for its rate of return. But drillers there still need natural gas prices near $2.50 to make a 10 percent profit.
"I think the gas market's broken," said David Pursell, managing director and head of securities at Tudor, Pickering, Holt. "You're in a world where the economics of the liquids are strong enough to keep me drilling, and the gas is kind of an afterthought."
The Huron play is mostly in several counties in Eastern Kentucky, with some drilling in Virginia, Stark said. Its steady, but modest production would be profitable at normal prices, but has probably made it a low priority for drillers during the country's gas rush, IHS analysts said. It isn't listed in the rankings from Tudor, Pickering, Holt & Co.
EQT will keep about 200 employees in Kentucky to maintain the producing wells, gathering lines and other operations there, Cox said. But without a lot of liquid hydrocarbons or cheap infrastructure, and with its location farther from the populated eastern markets, the Huron is a harder formation to profit from, Stark said.
Natural gas futures sank 12 percent this week and are down 50 percent over the past year. Without a dramatic change toward colder weather, prices are likely to stay low for months, Stark said. Producers are worried about storage surpluses heading into the spring.
"We need to get that supply-demand balance flipped," Cox said. "There is just such an abundance of gas, and the demand is not there right now."
Gas producer Range Resources Corp., with a regional headquarters in Cecil, remains active in the Huron shale.
"But a large part of our investment is in our oil and liquids-rich assets, mostly in Southwest Pennsylvania and the Texas panhandle," spokesman Matt Pitzarella said. "Despite low gas prices, this is still an exciting time in this industry."
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