America’s giant Marcellus shale field finally succumbs to downturn

Drilling rig
Source: DollarPhotoClub

It seems that the low oil and gas prices have finally got to U.S. biggest shale field. According to DrillingInfo, which monitors rig activity, Marcellus Shale drilling permits issued for the 90,000-square mile (233,100 sq km) reservoir beneath Pennsylvania, Ohio, and West Virginia, slumped to 68 in October from 76 in September. There were still 160 permits issued in June and over 600 a month at the peak in 2010.

The production in the Marcellus region still accounts for a fifth of U.S. natural gas supply, so some hope that a slowdown in the field will put an upward pressure on the rock-bottom-low gas prices the area sees currently.

U.S. natural gas production has risen 30 percent since 2008, flooding the market with cheap hydrocarbons which depressed prices to levels that many producers find uneconomical. The Marcellus region was particularly hard hit when the rampant production combined with a lack of pipelines to bring the gas to the market resulted in bottlenecks that depressed the prices event further.

Another exacerbating factor is the fact that all of this production comes on top of the gas that is already in storage. The 3.9 billion cubic feet in storage recorded at the end of October was almost 4 percent more than the rolling five-year average.

This lead to a situation where companies found production no longer makes sense. “It is better to choke back than to sell into this market,” Matt Henderson, a spokesman for Inflection Energy, a Denver-based privately-owned company with an office in Williamsport told Fortune Magazine.

NYMEX gas futures have dropped from over $4 per million British thermal units a year ago to just above $2 this week. Meanwhile, Henry Hub, a national benchmark for natural gas prices, averaged $2.34 per million British Thermal Units in October. That average was nearly $3.78 per million BTUs the October prior.

Many look with hope to a curb in production from the Marcellus, expecting that in conjunction with new pipelines due to come online in 2016, and the new LNG export facilities will push the prices back up to a level where production once again becomes economical.

Having said that, the U.S. Energy Information Agency (EIA) expects lower Marcellus production only through March, and a rise for the rest of the year. The EIA does not expect a full year’s decline until 2019.

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