While natural gas production is booming in Pennsylvania, applications to drill unconventional wells in the state appear to have fallen off a cliff in the last three months while the number of wells spudded has been slowly declining for almost a year, indicating producers in the Marcellus and Utica Shales have gotten the gas glut message.
New drilling permits for unconventional wells approved by the Pennsylvania Department of Environmental Protection (DEP) for June, July and August (through Aug. 30) this year totaled 342, less than half the 798 permits issued for the same months in 2011.
New unconventional permits issued have been declining relative to 2011 since February, but the fall-off did not begin in earnest until June when only 135 permits were issued, compared to 224 in the previous month and 258 in June of 2011. July permits again fell off a ledge, with only 92 issued compared to 280 the previous July. August was bidding to follow suit with only 115 permits issued by Aug. 30, compared to 260 in August 2011.
Nothing has changed in the way applications are being processed, according to DEP spokesperson Kevin Sunday. By statute the agency has 45 days to process drilling applications and is staying on schedule. But despite the downturn in permits, he's not looking for production to fall off anytime soon. A total of 5,847 unconventional wells have been drilled in the state in the last five years, and "about half of those drilled are not yet in production," Sunday said.
Drilling of unconventional wells has declined over an even longer horizon, with the number of unconventional wells spudded per month hitting a 20-month peak of 210 in August 2011 and a low of 79 in August 2012 (through Aug. 30). The DEP updates its drilling and permit statistics daily.
The dramatic reduction in drilling and applications for permits in Pennsylvania is likely the result of several factors, including less pressure on producers to hold acreage by drilling, the double-barreled impact of both lower dry gas and natural gas liquids (NGL) prices and the opening up of new predominantly shale oil areas across the country.
"More and more Marcellus acreage is now held by production, so increasingly there is less of a need to drill for lease-retention reasons," said NGI's Pat Rau, director of strategy and research. "Anecdotal evidence from quarterly earnings conference calls suggests there still is some drilling necessary to hold acreage, but it sounds like more and more operators are planning on reducing the number of rigs they dedicate to the Marcellus over the next few quarters."
Rau pointed out that there is always a lag between lower natural gas prices and dropped rigs (and hence permits to drill), so the lower prices the U.S. saw in the first half of 2012 may just now be starting to hit in earnest. "Another factor relating to commodity prices is that NGL prices have fallen off a cliff in recent months, so that could be impacting the desire to drill the wet gas plays in Southwest Pennsylvania," Rau said.
"There also remain some bottlenecks in bringing gathering and processing facilities on line in Pennsylvania," he said. "That increases the number of wells that have been drilled but are awaiting completion. Perhaps that in turn is causing some to delay permitting new wells, especially in this lower price environment.
It's too early to say if the Marcellus frenzy is in the process of transitioning to a lower, smoother course. "Drilling activity in Pennsylvania may pick up somewhat in the months ahead as midstream bottlenecks get alleviated and as operators follow through on plans to test other unconventional formations in Pennsylvania, such as the Utica Shale and Upper Devonian formations. But overall, I'd expect the trend in new well permits in Pennsylvania will remain to the downside in the months ahead, especially as more and more land is held by production.
"Even if natural gas prices surge back above $4, I still don't think we'll see a major surge in Pennsylvania well permits, especially in the Marcellus, because so many operators in the Marcellus have other oilier prospects to which they can dedicate their rigs," Rau said. "E&P companies don't have unlimited drilling budgets, and $90-95 crude oil makes for pretty compelling economics in many oil plays, which the Marcellus, by and large, is not."
What the Marcellus does have is location, location, location. In the longer term more infrastructure and increased outfitting of downstream businesses and homes for natural gas use in the adjacent East Coast megalopolis will define the future for the eastern shale plays.
Earlier in August the DEP reported that during the first half of 2012, unconventional wells in the state produced 793.1 Bcf or 4.36 Bcf/d, an 82.3% increase over the 435.1 Bcf, or 2.4 Bcf/d, that was reported for the first six months of 2011 (see Shale Daily, Aug. 22). The monthly average of permits issued over the last year was 238, with the months of September, October and December 2011, and January 2012, hitting more than 300 in a range of 305-350 permits per month.
Intelligence Press Inc. All rights reserved. The preceding news report
may not be republished or redistributed, in whole or in part, in any
form, without prior written consent of Intelligence Press, Inc.