What are the Effects of Falling Gas Prices on PA’s Marcellus Shale?

In July 2011, the wellhead price of gas was $4.27 per thousand cubic feet (Mcf). As of this morning that price had fallen to $2.09, a decrease of more than 51 percent in well less than a year. This trend is widely projected to continue as gas reserves approach storage capacity in the US, at a time of year in which suppliers are typically busy recouping the pipelines after peak wintertime consumption. There is plenty of speculation that the price could fall to $1 per Mcf, or maybe even lower, sometime this summer.

In Pennsylvania’s Marcellus Shale, however, drilling operators are still hard at work, having applied for 742 permits and drilled 383 wells in the first quarter of 2012.

For consumers, this is of course all very good news. On the other hand, energy companies, lease holders, and counties signing up for the new impact fee are losing money with the low price of gas.

To be sure, there are still plenty of leaseholders taking home plenty of dollars:

Reported Gas production from Marcellus wells: July to December 2011. Please click the compass rose and double carat (^) to hide those menus.

The map above was designed to show wells that would make less than $1,000 (blue); $1,000 to $10,000 (orange); and $10,000 and above (purple) in leaseholder royalties over a six month period, assuming a wellhead price of $2.00 and 12.5 percent royalty (1). At these conditions, of the 2,257 Marcellus wells reporting production for the last half of 2011, 1,651 would have yielded royalty checks over $10,000, and 104 wells would have yielded less than $1,000.

Can Non-Productive Wells Be Avoided?

While there is widespread disagreement about many issues surrounding the Marcellus Shale in Pennsylvania, it is in nobody’s best interest to drill and stimulate wells that are not going to be productive. The question is, can drilling of relatively unproductive wells be avoided? These data don’t provide a difinitive answer to that, but do show how variable production returns can be, even on a local scale:

Production from Marcellus wells in southwestern Pennsylvania from July to December 2011, by municipality and well.

This map shows communities where very large amounts of gas are produced (dark red) adjacent to those where no gas is produced at all. And even within those dark red municipalities, there is considerable variability between the wells themselves. In Cumberland Township, Greene County, for example, there are two adjacent wells that each produced more than 600,000 Mcf in the reporting period, but less than a third of a mile to the north is another Marcellus well that produced only 7,383 Mcf (2).

For all the analysis that doubtlessly goes into placing the wells, the gas yields seem highly variable, even at very short distances.

  1. Just to be clear, the production numbers from these wells were from late 2011, when the wellhead price of gas was well above $2.00. The purpose of this map is to give a general idea of what royalties on $2.00 gas would look like in Pennsylvania’s Marcellus.
  2. I’m not going to claim that this result is typical without doing any spatial analysis, but it can be considered as anecdotal evidence of variability, in conjunction with the distributions visible on the map above.
4 replies
  1. Lane Luxmore
    Lane Luxmore says:

    The first factor that makes up the price of gas at your local station is crude oil suppliers. This makes up about 59% of the price you pay for gas and it is determined by the world’s oil-exporting countries, particularly OPEC, the Organization of the Petroleum Exporting Countries. The amount of crude oil that these countries produce determines the price per barrel of oil.;`

    See ya soon

  2. Matt Kelso
    Matt Kelso says:

    John, the value of the liquids is a fair point, but the reported statewide values from the Marcellus Shale are not that high. The same production report that the discussion here is based on includes a total of 487,438 barrels of condensate and 20,685 barrels of oil during the six month period. Interestingly, over 99 percent of both categories come from wells in Washington County.

  3. John Peterson
    John Peterson says:

    One of the reasons for continued drilling in Marcellus is natural gas liquids. They are much more valuable than the gas in many cases, as the market for them is related to the price of oil, which continues to be high. This data would be more useful if it included that dimension. Some of these wells with little gas might be producing significant liquids. The percentages and numbers of wells in the various categories would also be useful, along with the total production numbers, especially for the unbounded category (over 40,000).

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