Every market runs in supply-demand cycles, even petroleum. With natural gas prices at near-record lows, major companies in the Marcellus shale natural gas play are backing off their aggressive pursuit of leases.
Natural gas prices have dropped about 49% from the June 2011 peak of $4.92 per million Btu (MMBtu) to the current level of around $2.50 (Henry Hub spot price, the benchmark supply point in Louisiana). In late April, natural gas hit a 10-year low of $1.82.
That's one reason Chesapeake Energy, the Marcellus shale's major player, has slowed its acquisitions, reports Jim Leonard, natural gas leasing consultant from Endicott, N.Y. Chesapeake and others are concentrating on leases that allow them to delay drilling infinitely or hold wells in production with little or no actual activity.
Declining numbers of drilling rigs in Pennsylvania are another clue. Tom Murphy of Penn State University's Marcellus Center for Outreach and Research, reports that 95 rigs were working in Pennsylvania in early May, down about 15 from a year ago. Half of the wells drilled aren't currently producing, adds Murphy. "The biggest reason is the lack of pipelines."
But there's another even bigger reason. Due to the huge natural gas surplus, inventories in underground storage have persistently exceeded the five-year average since late September last year, according to Leonard Zacks, CEO of Zacks Investment Research, Inc. And he predicts that gas production is likely to test the nation's underground storage capacity by fall.
As noted, this has forced natural gas players to announce drilling/volume curtailments. Talisman Energy Inc., another major Marcellus player has slashed its 2012 capital budget to minimize investments in development drilling.
Drilling activities have also shifted to western Pennsylvania, Ohio and West Virginia. There, fracked wells in the deeper Utica shale formation yield higher-value liquefied gas plus oil.
"We don't expect much upside in gas prices in the near term," says Zacks. "There appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumps in 2012."