Drilling Slowdown Hits Appalachian Gas Output

(Februrary 3, 2020) — A commitment from Appalachia’s natural gas producers to slow drilling activity this year is already taking its toll in the region, with December production levels seen to register their first monthly decline since May, reports S&P Global Platts. Modeled output across the Marcellus and Utica shales averaged 33.3 Bcfd in December, roughly 170 MMcfd below the November average.

The largest decline came from Pennsylvania’s northeast dry window, where sample production fell by more than 160 MMcfd in December, or about 1.4% compared with a month earlier. The state’s south dry window witnessed a 1% retreat in sample receipts over the same period, equivalent to about 60 MMcfd. Smaller gains and declines in output were reported from other production areas across the region.

Lower December output from Appalachia tracked a recent acceleration in rig cuts there. In October, Marcellus and Utica producers pulled 10 rigs from the field, or about 16% of the fleet. Data showed Appalachia’s aggregate rig count at 51 as of mid-December, down from 83 in March when drilling activity stood at close to a previous multiyear high.

During the recent 2019 third-quarter earnings season, some of the largest producers from across the U.S. Northeast committed to dialing back production this year if the current low price environment persists. Southwestern Energy CEO William Way told analysts and investors that the company would slow or even halt drilling if needed, highlighting the company’s prior cuts in 2016, which were prompted by similar market conditions.

Executives from Cabot Oil & Gas and Range Resources also made commitments on earnings calls to keep production at maintenance levels in an effort to return more value to shareholders. In previous earnings seasons Northeast producers underscored their commitment to spending discipline and sustainable growth. Given the prolonged downturn in gas prices, though, and considering sustained weakness in 2020 forward prices, a pause in Appalachia’s seemingly unstoppable growth trajectory now seems increasingly likely this year.

After briefly topping $4/MMBtu in March 2019, prices at the Northeast’s benchmark supply hub, Dominion South, trended steadily downward, averaging about $1.90/MMBtu over the last eight months of last year. For this year, forward markets are expecting much of the same, with the calendar 2020 curve priced at $1.85/MMBtu, S&P Global Platts data show.

The cash and forward price environment has raised serious doubts about producers’ capacity to eke out a return on capital in Appalachia’s dry basins. According to Platts Analytics, breakeven prices in the Marcellus in December stood at $1.80/MMBtu. In the Utica, the wellhead gas prices required to break even was slightly higher at $1.94/MMBtu.

(SOURCE: The Weekly Propane Newsletter, February 3, 2020)