Musings: Gas Shales: Good News, Bad News

The Pennsylvania Department of Environmental Protection has released Marcellus gas shale production data for the 12 month period from July 1, 2009 through June 30, 2010.  The 632 producing Marcellus wells released 180 billion cubic feet of gas, more than double annual natural gas production in Pennsylvania from years before gas shale exploration began.  The data was made public in response to changes to the state’s oil and gas disclosure law that mandates well-by-well production totals be released every six months.  The revision to the disclosure law eliminated the provision that would have kept this data confidential for five years. 

Exhibit 1

John Harper, chief of the minerals resources division of the Pennsylvania Geological Survey, pointed out to The Scranton Times-Tribune that Marcellus wells that produced gas in the last fiscal year averaged almost two million cubic feet per day (cf/d) and was “a lot better” than the earliest dozen or so Marcellus wells in the state that only averaged 89,000 cf/d. 

Marcellus gas produced last year was worth about $720 million, which is a large number but less than the cost of drilling and developing the wells

Dr. Terry Engelder, professor of geosciences at Penn State University and a student of the Marcellus gas shale, said the production data shows that expected ultimate recovery from the wells will exceed industry predictions.  He compared the average cumulative production for Marcellus horizontal wells in the 5-county core area of the North Central and Northeast part of Pennsylvania to predictions made to investors in 2008 by Chesapeake Energy (CHK-NYSE).  While the production data is better than expected, Dr. Engelder also noted that the Marcellus gas produced last year was worth about $720 million, which is a large number but less than the cost of drilling and developing the wells.  It is these negative economics that are beginning to play havoc with the profitability of the E&P companies active in the gas shale formations. 

Exhibit 2

We are now seeing numerous producers indicating they are actively reducing or planning to reduce their rig counts in the gas shale formations around the country in response to the poor well economics – low natural gas prices and high drilling and well completion costs.  Without a large volume of natural gas liquids in shale gas production, current gas prices make these wells uneconomical.  As Dr. Engelder pointed out with the Marcellus data, producers are destroying capital by continuing to drill wells in this low gas price environment.  Drilling activity in the gas shale formation continues to be driven by the need for producers to secure their leasehold positions with producing wells.  Until drilling driven by the gas shale land rush leasing environment of the past three years is over, there is little reason to expect much of a rig count decline in the near term.  Most likely the end of the lease-driven drilling will happen in 2011, unless operators exhaust their financial resources and are forced to cut their drilling activity. 

All the data supplied by the companies must be delivered along with a statement attesting to its accuracy signed by a "responsible corporate officer" under penalty of the law

The bad news for the industry may have arrived in letters sent by the Environmental Protection Agency (EPA) to nine U.S. companies involved in providing fracturing services to the E&P industry.  The letters asked for substantial detailed information such as: a list of the chemicals and their composition used in hydraulic fracturing fluid formulations; all data and studies related to the human health and environmental impacts and effects of these chemicals; the policies, practices and procedures employed in fracturing operations; and information about all hydraulic fracturing jobs performed within the prior 12 months.  All the information is to be supplied voluntarily.  If insufficient data is provided, the EPA will consider legal actions to secure the necessary data it feels it needs.  In addition, all the data supplied by the companies must be delivered along with a statement attesting to its accuracy signed by a “responsible corporate officer” under penalty of the law.  Increasingly the federal government is using the power of perjury as a way to intimidate corporate, and especially energy company, officers.

The purpose of this data request is, according to the letter, “To help the EPA evaluate the potential impact of hydraulic fracturing on drinking water quality and public health.”  The EPA study is in addition to the investigation of the hydraulic fracturing process by Congress.  Many people in the industry are concerned that the EPA study is the first step toward the agency gaining more control over fracturing regulations, even though many Washington observers remain convinced that Congress will not overturn the ruling exempting hydraulic fracturing operations from regulation under the Clean Water Act.  It may be a while before the EPA study is completed, but until it is and the industry is cleared, we will keep our fingers crossed. 

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.

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