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Falling prices may halt shale rush

WHEELING, W.Va. — Gastar Exploration is among several companies cutting their drilling forecasts for this year, a sign that lower natural gas and oil prices are starting to hit home in the Marcellus and Utica Shale region.

The spot price of natural gas is nearing $3 per thousand cubic feet, the lowest it’s been since it fell below $3 per Mcf in mid-2012.

The reason is simple: there’s just too much natural gas.

Consider this: in December 2004, the average daily production of dry natural gas in the United States – the product used in home heating sources – stood at about 2.8 billion cubic feet. In December 2014, production had swelled to more than 39 billion cubic feet per day, according to the U.S Energy Information Administration.

There’s also more oil, which has led the price per barrel to fall to about $48. That is less than half the $100 per barrel price in July – and is down from about $80 just two months ago.

Natural gas liquids, such as ethane, propane and butane, are also in abundance, leading to lower prices.

With prices down and supply up, the local region’s drilling boom will suffer.

“We have a glut of oil, a glut of natural gas liquids, and a glut of natural gas,” R. Dennis Xander, past president of the Independent Oil and Gas Association of West Virginia, said. “It’s really just supply and demand.”

Tim Carr, Marshall Miller professor of Energy at West Virginia University, said it’s likely going to take a mindset change from oil- and gas-producing nations – meaning a willingness to cut production – for prices to increase.

He also noted that low prices could impact investment in the Marcellus and Utica region.

“I expect drilling will really slow down in shale,” he added. “I would think that investment capital for drilling is tough to attract at these prices.”

And he’s right. According to the U.S. Energy Information Administration, some Marcellus gas being produced today is selling for less than $1 per unit on the wholesale market. “Very substantial production gains over the past few years, especially compared with last year, combined with constrained pipeline takeaway capacity have boosted the supply of natural gas within the region,” according to the EIA.

For Gastar, at least, that means it’s time to slow down production.

“We are slowing down our activity,” company Vice President and Chief Operating Office Mike McCown said. “The NYMEX price is around $3. We get even less than that for our gas because there is such a glut of gas here.”

PDC Energy is eliminating its funding for Ohio drilling altogether this year. Oil and natural gas giant ConocoPhillips, meanwhile, slashed its drilling budget by 20 percent for 2015, emphasizing that it will defer spending in North American shale plays.

“We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” ConocoPhillips Chairman and CEO Ryan Lance said.

McCown said more processing and pipeline infrastructure are needed to be able to transport Marcellus and Utica gas to market. At least four major pipeline projects to do just that are in the works, but are not yet complete: the Atlantic Coast Pipeline, the Rover Pipeline, the Leach XPress and the Mountain Valley Pipeline.

“You are going to see a lot of activity in the areas where that Atlantic Coast Pipeline is going,” Xander said regarding the project that would ship 1.5 billion cubic feet of Marcellus and Utica gas per day for use in North Carolina.

Not all companies are cutting back. XTO Energy spokeswoman Suann Guthrie said the firm, which is a subsidiary of oil and natural gas giant Exxon Mobil, should continue its plans in Ohio.

“Exxon Mobil is uniquely positioned to invest in new energy supplies throughout the business cycle. Our capital spending plans are unaffected by the recent reduction in oil prices. We use a range of pricing to evaluate our investments,” she said.

Xander said when he started a career in the oil and natural gas industry 40 years ago, a barrel of oil sold for about $5. That price jumped nearly eight-fold to $38.50 by 1980.

“There are natural fluctuations in the market. Things are going to go up and down,” he said. “The good thing is that cheap energy drives the economy. Everything you buy comes on a truck. For the average ‘Joe,’ these low prices are a good thing.”

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