July 25, 2017
Oil prices have been lousy for so long that U.S. producers are hoarding unfinished wells rather than pumping crude out of them. In the natural gas patch, just the opposite is happening.
While the energy slump has idled lots of wells for both commodities, their economics have diverged. Oil remains at half its price in 2014, leading to a record backlog of drilled-but-uncompleted wells spread across shale formations where fracking brought on a surge in crude production. Meanwhile, gas futures are almost double last year’s low, and the so-called fracklog of wells in the Marcellus gas fields of Pennsylvania and West Virginia is shrinking as drillers there unleash supplies to take advantage of higher prices.
By the end of June, the fracklog in the Marcellus was the smallest in the three and a half years since government data has been collected. The drop portends a production boom that could imperil bullish gas bets, which jumped to a three-year high in May on speculation that a hot summer, new pipeline capacity and rising exports of the fuel would boost demand.
Gas explorers are “putting a down payment on a bull market that companies hope is coming,” said John Kilduff, a partner at the commodities hedge fund Again Capital LLC. They’re “taking the view that prices are going to rebound.”
When prices were dropping in 2014 and 2015, drillers left a growing number of wells unfracked in the Marcellus, America’s biggest gas play. With the market up and new pipelines promising to shuttle more of the fuel to market, the backlog has fallen from 831 wells in July 2015 to 643 last month, government data show. Fracking them is the cheapest way to bring on new supply because the money has already been spent to dig the hole.
For a look at why drilled-but-uncompleted wells are OPEC’s next big problem, read this column.
Some of the wells were completed to satisfy delivery contracts, but there was also the incentive of higher prices. Gas futures in New York have rallied 81 percent since touching a 17-year low in March 2016 of $1.611 per million British thermal units. Futures traded at $2.922 as of 8:10 a.m. Tuesday.
Not only are the nation’s gas explorers bringing wells online at a faster pace — they’re also drilling new ones. Output from the Marcellus is set to reach a record 19.8 billion cubic feet a day in August, the U.S. Energy Information Administration forecast this month.
Some of that supply is being sold outside the U.S. While the country was a net importer last year, exports of American shale gas have climbed to a record via pipelines to Mexico and Canada and ships carrying the super-chilled fuel to other countries.
Still, producers remain cautious after the recent market collapse, which has forced more than 100 oil and gas explorers into bankruptcy since the beginning of 2015, data from Haynes and Boone LLP show. Increased drilling may signal a supply boom and a return to low prices.
“It’s like surviving a near-death experience,” Peter Pulikkan, a New York-based analyst for Bloomberg Intelligence, said by phone. “You’re happy to be past it, but you’re still scared out of your mind.”
Some drillers who’ve spent millions boring holes through petroleum-rich shale rock are just waiting for new pipelines to come into service before turning on the spigot.
Appalachian gas producer Antero Resources Corp. can “fill fairly quickly” the space it reserved on one pipeline, Energy Transfer Partners LP’s Rover project, Chief Financial Officer Glen C. Warren said in May. Rover, now scheduled to partially start in late summer, has been plagued by setbacks since last year. On Monday, a report showed West Virginia had ordered the company to halt land development on the line due to water permit violations.
The rout in gas prices in recent years has meanwhile made drillers leaner, extracting more fuel for less. Appalachian producers can now break even at less than $3 a million British thermal units, a 15 percent improvement from a year earlier, said James Williams, a London, Arkansas-based economist for WTRG Economics.
Declining costs may only help drillers so much, however. As pipeline flows begin and more producers kick up activity, drillers may have to compete for workers, said Brian Youngberg, an energy analyst at Edward Jones in St. Louis.
“It’s going to be challenging for all of these companies to get enough people,” he said.