There have been a number of encouraging headlines/stories in recent weeks regarding the shale gas industry in our region.
“Report: 2 million more natural gas jobs by 2040” in neighboring Ohio and West Virginia, read one.
Another story noted how property had been purchased for yet another ethane “cracker” plant in Belmont County, Ohio, three score miles downstream from the one being built in Beaver County, Pa., along the Ohio River.
And an Associated Press headline noted that “After dismal 2016, shale gas drillers” in Pennsylvania “begin to turn a corner.”
All that indeed is good news. But there was another headline and story, this one on Forbes.com, that didn’t garner nearly as much attention: “Shale gas is not a revolution.”
That was atop a quite lengthy article by Art Berman, a veteran petroleum geologist, that should serve as a cautionary tale to everyone connected with the shale gas industry.
The biggest takeaway from Berman’s very technical piece is that producers consistently have lowballed the marginal cost of shale gas production:
“Shale gas producers have been making exaggerated claims about low-cost supply for so long that markets now believe them. Sell-side analysts routinely gush about sub-$3 break-even prices (per mmBtu) despite corporate income statements and balance sheets that show otherwise.
“Marcellus leaders Cabot, Range and Antero spent an average of $1.43 for every dollar they earned in 2016; Chesapeake had negative earnings for the year – it couldn’t even pay for operating expenses out of revenues before (emphasis in original) capital expenditures and other costs.”
In the first quarter of 2017, he says the companies, on average, had to spend $2.12 to earn $1.
A few other points from the Berman analysis:
– “Most gas-market observers anticipate a” new “supply glut and gas-price collapse beginning late in 2017 because of new pipeline take-away capacity from the Marcellus-Utica plays.”
– Producers share prices have fallen nearly 30 percent thus far this year; “Although investors have been willing to fund the unprofitable efforts of these companies for years, I suspect that their patience is wearing about as thin as it has lately for tight oil.”
– Indeed, while producers have cut costs “substantially, this is more because of deflationary pricing by the service industry than because of technology and innovation.”
None of this recitation is to pooh-pooh the import of the shale gas industry; the many benefits are manifest and have been well documented.
And just as there are as many opinions as there are faces about shale gas, some will disagree with Berman. Some industry advocates consider Berman’s analysis to be an outlier point of view.
But, still, Berman’s take does shed some too-often eclipsed light on the serious challenges this industry has faced and will continue to face. And while some will argue that Berman’s take shows how unsustainable the shale gas industry now is – too much product, too low prices — it should buttress the argument against Pennsylvania imposing a severance/extraction tax — one that can only make life for this industry that much more difficult.
Colin McNickle is a senior fellow and media specialist at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).
