Energy sector adjusts to global oil plummet

Mark Marmo is expecting $5 million in gas well equipment in a few months, and wants to hire 60 workers to operate it.

He doesn't expect the shale boom that feeds his Zelienople business to fizzle out.

“What our customers are telling us is they're going to stay active,” said Marmo, president of Deep Well Services, which contracts with operators to complete wells in the Utica and Marcellus shales. “You're always going to get pressures, with companies looking for the right price. But we're used to that stuff.”

The global crash in oil prices that began this summer with increases in American shale production — and accelerated recently because of OPEC maneuvering — has sent chills through the energy sector. Some major companies, whose aggressive exploration of shale oil and gas reserves changed the face of energy production, are dialing back plans for 2015 while dealing with stock prices that tumbled.

That could hurt field service companies and related manufacturers forced to slash prices, lay off employees or cut back drilling activity.

The price crash benefited consumers through lower gasoline prices, though. And shale gas production in Pennsylvania, Ohio and West Virginia could benefit.

Natural gas prices are low, especially in the northern reaches of the Marcellus, but more stable and insulated from oil, analysts say. Companies adjusted to the lower prices here. The shale below Pennsylvania is among the cheapest to exploit.

“The operators that have figured out the economies of scale, and have been able to get very, very efficient, will be able to weather the storm,” said David Yoxtheimer, an associate at Penn State University's Marcellus Center for Outreach and Research.

He and others predict companies will shift resources from less-profitable oilfields to Appalachia as pipelines are built.

“I think a sustained low oil price should increase interest in the Marcellus and result in more rigs and services coming into the area,” said Andrew Byrne, director of North American equity analysis for Connecticut-based analyst IHS.

Wringing out costs

The energy sector's success helped cause its pain. Huge increases in U.S. shale production first caused a glut of gas in Appalachia — where prices started falling lower than the national benchmark in spring — then fed a global oversupply of oil. OPEC's decision last month to maintain production drove the price of oil to the lowest level in five years.

“With no sign that OPEC is reconsidering its decision to leave production targets unchanged, the impetus falls on non-OPEC producers to limit supply growth and bring the market back into balance,” Paul Chowdhry, head of research at energy analyst Wood Mackenzie, wrote in a report this month.

Marathon Oil and ConocoPhillips announced spending cuts of as much as 20 percent. Dallas-based Exco Resources suspended its cash dividend. Chevron Corp. stopped its plan to drill for oil in Alaskan arctic waters.

The price at which drilling oil remains profitable varies by company and region, but many analysts look to $70 per barrel as a measuring point. Below that, more companies must cut back or lose money.

“If it gets back to the low 70s, most are going to drill at a profit except for tar sands,” said Kent Moors, founder of Oil and Energy Investor and executive chair of the global energy symposium in Pittsburgh.

Analysts expect the rig count to drop by several hundred, especially in Texas and North Dakota. Major oilfield service companies should prepare to cut prices.

“The operators will look to wring out some costs, though it's not in their interest to see oilfield companies hurt too bad,” said Lysle Brinker, director of transaction, valuation and risk research at IHS Energy.

Contractors in shale gas fields say they adjusted to pressure to lower costs. Some joined forces to offer operators discounted packages.

“Bundling and consolidation are the new norm,” said Beth Powell, vice president and general manager at Blair County-based New Pig Energy, which installs well pad containment systems.

Fort Worth-based Range Resources Corp., Pennsylvania's most prolific shale driller, lowered its capital spending plan for next year by 18 percent, though it plans to spend more than $1 billion on wells and increase production by at least 20 percent. More than 90 percent of that spending will take place in the Marcellus.

Marcellus looks good

Despite pipeline constraints, Marcellus activity is increasing. During the past eight weeks, companies started drilling 214 wells in Pennsylvania shale, a 20 percent increase from the same period last year, state records show.

“Companies in decent condition will probably keep drilling at a pretty good rate if they have good acreage,” said Brinker.

Gas operators lowered costs with technology at wellheads, by drilling longer horizontal lengths and by putting more wells on pads. Downtown-based EQT Corp. this month started work on 19 wells from a single pad in Morris in Greene County.

“It's likely that we may have future drilling pads with even more wells,” said EQT spokeswoman Linda Robertson.

EQT increased its spending plan for next year, devoting $1.95 billion to well development that will include 181 Marcellus wells and 58 in the Upper Devonian formation above it.

The company plans only 15 new wells in the oil-rich Permian Basin lands it bought from Range, half as many as initially expected.

“Marcellus potential returns (are) looking good, relative to most tight oil plays now,” Byrne said.

David Conti is a staff writer for Trib Total Media. He can be reached at 412-388-5802 or dconti@tribweb.com.