This first article in a series of energy updates focuses on the latest news from Texas and Pennsylvania. Follow The Modular Zone’s Energy Corner for future updates.
Texas, the nation’s top oil producer, accounts for about 46 percent of all rig activity. With oil currently in over-supply and prices holding near 10-year lows, logic would dictate that exploration and drilling in the state would slow.
But energy company executives and regulators alike are cautiously optimistic that Texas will weather the downturn.
Commenting on the current state of Texas energy, state energy regulator and railroad commissioner Christi Craddick highlighted encouraging oil industry activity in West Texas’ Permian Basin, the nation’s largest shale field, earlier this year. Craddick said that although the total number of active drilling rigs in the region is down, the Permian Basin is still responsible for record oil production at 1.35 million barrels of oil per day.
According to Craddick, there are “a few key reasons why companies from across the world choose to produce energy in Texas, particularly here in the Permian Basin. Prime conditions – an ample supply of oil, a skilled workforce, vast infrastructure, cutting edge technology and innovation, and sensible government – have allowed producers to cut back overhead costs and sustain in times of low oil prices.”
She continued, “Even as foreign oil producing nations continue their economic assault on the U.S. energy industry, Texas and its associated energy companies are better positioned to compete because of higher efficiencies, advanced technologies and lower production costs. And when demand for oil rises again, as it is certain to, Texas will be well-positioned and ready to respond. Until then, production in the Permian Basin will carry on.”
Oil producers in the state have been similarly confident, believing they can profit despite prices below $35 a barrel. Drillers have forged ahead, raising an estimated $2 billion through share sales over the past few months.
In January, both Pioneer Natural Resources Co. and Diamondback Energy Inc. announced multi-million-share sales. Startup Invictus Energy LLC received private equity firm funding to drill the Permian Basin, as well as South Texas’ Eagle Ford Shale.
Pioneer also had been drilling in Eagle Ford Shale, but announced on February 11 it planned to pull all six of its drilling rigs out of that location this quarter. It is also moving two of its pressure pumping fleets from Eagle Ford to the Permian Basin. Pioneer plans to focus on the Permian Basin, where it has more land than any other oil company. Pioneer also stated that it was cutting its horizontal drilling program in half due to low oil prices.
With 2015 a bad year for the drilling industry in Pennsylvania, many energy experts believe the outlook will be even worse in 2016. However, industry leaders say they are still committed to developing Pennsylvania's Marcellus and Utica Shales.
Only 19 drill rigs were operating in Pennsylvania as of early February, down 65 percent in the last year (according to the Baker Hughes rig count). Pennsylvania now has fewer drill rigs operating than in 2008, prior to the shale boom.
Drilling cutbacks by several major shale-gas operators are expected to lead to less spending on local suppliers, construction companies and others.
For example, Houston firm Cabot Oil & Gas Corp., cut its Marcellus operations from two rigs to one. Pittsburgh producer EQT Corp., said it would cut capital spending to $1 billion from $1.8 billion last year. Southwestern Energy Co. and Consol Energy Corp. also have announced their plans to halt new drilling.
Seneca Resources Corp., the exploration and production segment of National Fuel Gas Company, announced on February 5 that it planned to eliminate one of its two remaining drill rigs in northern Pennsylvania next month and also delay finishing a pipeline from the state to New York until 2017.
Ronald J. Tanski, National Fuel's chief executive, did express optimism, pointing to the cyclical nature of operations he’s witnessed throughout his many years in the industry, saying, "We just happen to be at the down-point right now.”
Factors cited as contributing to the slump in Pennsylvania drilling activity include low energy prices, the lack of pipeline infrastructure and some companies' enthusiastic drilling in recent years.
Commenting on the market situation, Erica Clayton Wright, a spokesperson for the Marcellus Shale Coalition (MSC), said, "It's vital we continue to focus on modernizing Pennsylvania's pipeline infrastructure network to create new market opportunities and connect more users, especially manufacturers, to our abundant natural gas supplies."
On February 9, Governor Tom Wolf proposed a 6.5 percent severance tax on Marcellus Shale production, up from his failed 2015 extraction tax proposal of 5 percent.
The only state that doesn’t impose an extraction tax on natural gas, Pennsylvania does charge a per-well “impact fee” on drillers, which has raised millions for local communities impacted by drilling. In Gov. Wolf’s proposal, the funds would remain, but the money would come from the 6.5 percent tax instead of a per-well fee. Revenue is estimated to be $133.1 million, which would add to the $217.8 million expected for the general fund.
The proposal is being met with strong opposition from other legislators as well as the industry itself. MSC spokesperson Wright commented, “We already are seeing significant reductions in capital expenditures and job losses. This is not the time to add additional taxes.”
Wolf’s proposal would require drillers to start paying the tax on July 1.