The Marcellus shale slump & natural gas prices
Permits and drilling follow the ups and downs of natural gas prices
After my last piece—“Is the Marcellus boom ending?”—a friend said he’d like to see how the activity compared with the price over time. The most common comment I got from others was the same: Price matters.
So I assembled the numbers, looking first at the most commonly cited natural gas price, the Henry Hub spot price.
The results astonished me.
I noticed that the pattern of natural gas prices and of permits were fairly similar, with the permits lagging price by about 6 months. So here, I’ve shifted prices forward six months—and the match is surprisingly close.
Why the permits would be following after the price changes from six months earlier, I don’t know. If anything, I’d expect the companies to be anticipating shifts in prices in the future, rather than reacting to past prices. So if any readers have an explanation, or an alternative way of explaining the ups and downs of permits, I’m interested to hear.
In the graph above, I used prices at Henry Hub, a major natural gas trading center in Louisiana. However, there are significant regional differences in natural gas prices, so it might be better to look at prices in Pennsylvania, such as Transco Zone 4 Marcellus or Transco Leidy Hub. (If anyone has that kind of data handy and is willing to share, please let me know through my contact form.)
I did my best to cobble together an approximation of Leidy and Zone 4 prices from sources like Natural Gas Intelligence, “Today in Energy” posts by the Energy Information Administration (EIA), and this blog post by Leo Haviland. It looks like the Zone 4 prices stuck fairly close to Henry Hub most of the time, until the summer of 2013, when a wide gap opened up.
So here’s the Marcellus permit activity compared with my best approximation of the Zone 4 Marcellus price—and as before, the natural gas price is shifted 6 months into the future. (As before, this shows only permits for unconventional wells.)
Again, the fit is pretty close. When the price is shifted 6 months ahead, then the price crash of summer 2013 comes just after today.
If this pattern continues, we’d expect the drilling to be plummeting right now—the effect of the Zone 4 natural gas price crash of the summer of 2013. Looking at Pennsylvania’s latest data on permits, they issued only 30 “drill and operate” the first 11 days of this month (Feb 1 to 10). If that is reflective of the month as a whole, the number of permits will be around 90, which would be the lowest since the boom peaked. If the pattern holds, perhaps the drilling will stay low, perhaps going even lower still.
I did some fancy statistics, calculating the “coefficient of determination” for various segments of it. But I’m not sure it tells you a lot that you can’t get from eyeballing the graph above. Also, I don’t have any good explanation of why the permits would be driven by what the natural gas price was 6 months earlier. Perhaps the best test of this hypothesis will be what happens with permits over the next few months. That is, let’s wait and see.
Of course, on the flip side, when natural gas prices rise, then you’d expect drilling to pick up again. And from what I’ve seen, Pennsylvania natural gas prices have rebounded recently.
It’s possible that there might be another explanation for all this. Perhaps this fit I’ve noticed is a coincidence, and there’s an even better fit with some futures prices for natural gas. But I couldn’t make sense of the data sets for futures that I could find, since there were a bewildering variety of futures, for contracts due the next day or the next month, in six months or in six years.
If any readers have suggestions on this front, please do let me know.
We can also take the same kind of look at the wells drilled compared with the price. Here I took my earlier graph with permits and price, and added wells drilled to it—specifically, wells Pennsylvania marked as unconventional, horizontal wells.
Drilling has been on a plateau for at least a year, though all of 2013, despite a surge in local natural gas prices.
So what does all this mean?
First off, to those who said “price matters,” I agree. It matters more than I thought, even. I suspected I would find some relationship between the price and activity in the Marcellus. But I didn’t suspect that there would be such a direct relationship.
My guess is that the plateau in drilling is because of bottlenecks in pipelines in the region. Producers know that if they drill more, they will only flood the market further, driving the price lower still. And from everything I’ve read, nobody is making money off shale gas when it’s $2 per million Btu.
Nonetheless, I’m sticking with my skeptical take on the Marcellus for now. Unless rising prices bring a major revival in drilling and new wells added, then it still seems to me that the Marcellus’ boom phase may end sooner than many expect.
That’s not to say that the Marcellus would suddenly stop producing gas, or that there would not be a lot more wells to drill. But if Marcellus production did level off, it may scupper the dreams of US natural gas production continuing to rise for decades, and of the U.S. no longer having to import natural gas—even becoming a net exporter.
Here’s EIA data for all U.S. dry natural gas production, from the major shale plays as well as non-shale gas, through June 2013 (the latest such data I could find from the EIA).
Outside of the Marcellus and the two big shale oil plays—the Bakken and Eagle Ford—U.S. natural gas production is declining. Even with strong growth in the Marcellus, Bakken and Eagle Ford, natural gas production has only been holding steady, roughly on a plateau for the past two years.
With the decline in major plays like Haynesville, and expected decline in the Barnett, will rising prices spur enough drilling to keep production rising?
As EIA director Adam Sieminski told the Philadelphia Inquirer, “For natural gas, EIA has no doubt at all that production can continue to grow all the way out to 2040.”
I’m not an expert on these things. I’m just someone who’s trying to dig into the numbers.
But I do have doubt.
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header photo credit: Creative Commons: Lock the Gate Alliance, 2011, via TckTckTck
