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Study: New York’s gas isn’t worth it

Shane Thielges|Shale Plays Media

The energy debate in America has settled pretty comfortably into a question of regulation. How much unrestricted ability should companies be given to keep reaping massive rewards? How much protection should be afforded to areas of wilderness?

This question, however, has some big assumptions built into it – significantly, that natural gas or oil drilling is, in fact, profitable.

How does the debate change if that’s no longer true?

A new study from the League of Women Voters of New York has found that most or all of the natural gas located in New York’s area of the Marcellus Shale is too unprofitable to make drilling operations worthwhile. In fact, across most of the state, natural gas would be valueless even at double the current selling price.

Commissioned in March and released earlier this month, the study was conducted by Labyrinth Consulting Services, Inc. of Sugar Land, Texas. The firm looked at data and practices from over 4000 active wells in Pennsylvania and West Virginia to determine whether identical operations would be viable in similar New York locations.

Their findings showed that surveying, constructing, and operating wells by current best practices would be expensive enough to outweigh any possible profits. That’s a problem for New York, whose 2014 energy plan is based on projections that the state could eventually recover at least 10% of its natural gas stores.

Natural gas prices have dropped dramatically since the early days of the shale boom, due to an increasing overabundance of supply and a ban on most exports. They are currently fluctuating between about $4 to $4.50 per million BTUs.

Major energy companies, such as Shell, have admitted to discontinuing operations because they were unprofitable. Of course, many also blame Shell for buying up unsurveyed land in the early days of the boom.

Related: Shell Drops out of Eagle Ford

The study estimates that even if gas prices were to double, only very small areas of the New York Marcellus would become viable development candidates – in total, 9.1 trillion cubic feet might be collectable.

Since the study relies on using current practices to estimate yields, it may be possible for New York to develop new strategies that cut costs. For example, they may be able to drill deep enough to extract from the Marcellus and underlying Utica shales simultaneously in a process known as “double dribbling.” However, because the Marcellus is so much more easily accessible, the Utica shale is largely unexplored and poorly understood. More work and more investment is needed before it can be utilized.

Of course one very common money-saving tactic is to simply cut corners. Energy companies nationwide save money with lax safety compliance and waste elimination procedures. Pennsylvania has also recently seen complaints from landowners that Chesapeake Energy has slashed their royalty checks in low earning areas, possibly illegally. But for obvious reasons, these are not the most appealing strategies.

The most likely and attractive option by far is to start exporting natural gas. There’s more than enough demand overseas to bring rates back up to profitable margins. And recent tensions in the Crimean peninsula have US lawmakers pushing to allow sales internationally.

This too could have a downside, of course. If gas prices rise too much, it could leave Americans wondering where the boom benefits them.

For now, though, drilling strategies have to remain in the realm of the theoretical. New York has been under a legally binding but officially unapproved fracking moratorium since 2008. Unless it sees some significant shift in conditions, that ban could end up extended indefinitely.

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