Shale gas executives writing budget plans might wish they could just skip 2016.
Few analysts predict any rebound before 2017 in the low prices that dogged producers this year and prompted a 40 percent cut in Marcellus drilling in Pennsylvania. Then a warmer-than-normal start to winter sent prices to low points not seen in 15 years, dipping below 75 cents per thousand cubic feet in Appalachia.
With storage at historic highs and little boost to demand expected for six to 12 months, companies that relied on 30 percent and 40 percent annual production increases in the past few years will face market pressure to dial that back yet maintain cash flow.
“We have an alarming accumulation of spare production capacity. To ensure that product does not come to market … we have to make it painful,” Teri Viswanath, a natural gas analyst at BNP Paribas in New York, said about the low prices she expects will endure until supply finds a balance with demand.
That means further cuts to spending plans at shale gas producers that must look for ways to keep the money and gas flowing until new pipelines and increased exports boost demand.
“We’re expecting no less than a 20 percent reduction from 2015, which was already 40 percent down from the year before,” said Mark Marmo, president of Zelienople-based Deep Well Services, discussing the contracting work his company does to complete wells for producers. “It’s going to be a battle.”
Marcellus and Utica producers have started to show how they intend to weather the storm, announcing plans over the past few weeks to partner with outside investors, concentrate on fracking uncompleted wells and focus on a limited number of locations from which they can reach the best layers of rock below.
“We will be focusing capital on the highest rate of return areas,” said Craig Neal, vice president of operations at Cecil-based Consol Energy, which plans to spend $400 million to $500 million on gas exploration and production, down from $800 million this year and $1.3 billion in 2014.
Consol, which announced this summer it would stop drilling for 18 months because of prices, has about 100 horizontal wells drilled but awaiting completion. Fracking one of those wells and bringing it online costs about half as much as starting a well from scratch.
“It’s a very efficient use of capital to stimulate wells that already have been drilled,” Neal said.
Downtown-based EQT Corp., the state’s fifth-biggest shale gas producer, said this month it plans to spend $820 million on well development next year, compared to the $1.8 billion budget it set for 2015. Like Consol, EQT will center its activity on a core area of developed pads and explore a few high-flowing wells in the deeper Utica.
“The Utica results so far are very encouraging,” Neal said, noting that a shortened learning curve on those wells allowed crews to cut the per-foot costs of drilling and fracking them in half.
Cutting those costs required a combination of efficient work and concessions by contractors. Producers have said they got service companies to cut prices by about 20 percent across the board. “We’ve had to reduce day rates. But we won’t go below a certain level,” Marmo said.
Producers want to reduce time spent on a well pad without compromising safety. A year ago, Marmo’s crew took five days to drill out the plugs on a well to bring it online. Now it takes three, he said.
“Increases in drilling efficiency will continue to support growing natural gas production … despite low natural gas prices and declining rig activity,” the U.S. Energy Information Administration said in this month’s short-term forecast.
Consol is experimenting with performance-based contracts that pay a service provider more if it meets safety and production targets, and less if it fails to do so. Deep Well offered similar deals to producers.
“We’re willing to work, so give us your schedule, how many days we have to get it done, and if we work over that, it’s on us,” said Marmo, who noted a few producers have been receptive.
To maintain activity levels and stay in business until prices rebound, at a time when banks likely won’t extend more credit, some producers are lining up outside help.
Houston-based Seneca resources, Pennsylvania’s 12th-biggest shale gas producer, this month said it signed a joint-venture agreement with investment firm IOG Capital to fund well development with up to $380 million.
Cecil-based Rice Energy, which moved past Consol this year into the No. 10 spot among shale gas producers in Pennsylvania, said an unnamed infrastructure fund would invest up to $500 million in the company and its pipeline subsidiary.
“This planned transaction strongly positions Rice to fully fund its 2016 (exploration and production) budget with cash on hand and operating cash flow,” said Chief Financial Officer Grayson Lisenby.
The need for outside help became more pronounced with the warm winter. The Energy Information Administration this month lowered its 2016 average price projection by another 12 cents from the previous month’s forecast.
Companies are maintaining their predictions of moderate production increases with the hope prices will bounce back.
A sustained rebound would require better agreement between supply and demand. Whether supply drops first, or demand increases enough, remains unclear.
Viswanath said a demand boost is coming from pipelines set to come online in 2017 and from exports of liquefied natural gas that will start heading overseas soon.
Analysts with Bentek Energy said producers could get some relief in 2016 if the weather cools and eats into storage.
“We think there’s potentially some reason why prices might tighten,” said analyst Jeff Moore, citing increased exports.
David Conti is a staff writer for Trib Total Media. He can be reached at 412-388-5802 or firstname.lastname@example.org.
This article was written by DAVID CONTI from The Pittsburgh Tribune-Review and was legally licensed through the NewsCred publisher network.