Natural gas industry in Pennsylvania remains strong

Overview:  Pennsylvania has always been a state with abundant natural resources, including oil, coal and natural gas.  Natural gas wells have dotted the Pennsylvania landscape since the 1870s.  In the early 2000s, the discovery of natural gas in the state’s Marcellus and Utica Shale formations and the ability to use the method of hydraulic fracturing to retrieve the gas has made Pennsylvania the second largest natural gas producer in the U.S. just behind Texas (23.9 percent vs. 21.1 percent of total U.S. production).

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This Brief examines the drilling of natural gas rigs, both conventional and unconventional (hydraulic fracturing or fracking) from 2005 through 2021.  All data comes from the Pennsylvania Department of Environmental Protection (DEP).  The data is confined to just wells drilled for the purpose of removing natural gas. Wells that are drilled into coalbed seams (methane), oil wells, combined oil and gas wells and other well types were removed from the sample.

New wells being drilled

The number of new wells being drilled in 2005 was nearly 4,000 with 3,985 conventional wells and just nine unconventional wells (1 in both Elk and Westmoreland Counties; 2 in Bradford County and 5 in Washington County).  Twenty-eight counties had conventional wells drilled within their borders that year.

In this 17-year sample, the peak year for drilling conventional wells occurred just two years later in 2007 when 4,824 wells were drilled.  The decline began in 2008 when 4,646 were drilled, and then in 2009 that amount was slashed by more than half to just 2,013.  In 2019 the pre-pandemic count of new conventional wells drilled fell to just 172, a drop of 96.4 percent since 2007. The pandemic year of 2020 saw only 48 new conventional rigs drilled and in 2021 there was a small rebound in drilling with 128 rigs breaking ground.

The accessibility of the Marcellus and Utica Shale formations played an important role in the decline in the number of new conventional wells being drilled as drillers switched over to unconventional wells.

As mentioned, in 2005 there were just nine new unconventional wells drilled.  By 2010 that number reached 1,601.  The peak for new unconventional wells was in 2011 when 1,958 were drilled.  In 2019 that number had fallen to 576 and in 2020 fell further to 467 before bouncing back up to 519 in 2021. 

Price of natural gas

The U.S. Energy Information Association keeps track of the price of natural gas as sold on the New York Mercantile Exchange (NYMEX) also known as the Henry Hub Natural Gas Spot Price.  The trading price of natural gas will either encourage drillers when the price is high or discourage them otherwise. 

In 2005 the average annual price for natural gas was $8.69 per million British Thermal Units (BTUs).  That price dipped below $7.00 in 2006 and 2007 before reaching $8.86 in 2008. In 2009 the price fell to $3.94.  From 2010 to 2019 the annual average price of natural gas ranged from a low of $2.56 (2019) to $4.37 (2010 and 2014).  In 2020 it bottomed out at $2.03 before rising to $3.89 in 2021. 

Total natural gas wells in the Commonwealth

While the falling price of natural gas may have discouraged producers from drilling too many new rigs each year, the total number of wells producing continued to climb.  It is also worth noting that not every rig that is drilled becomes a productive well.  Whether or not a well is productive, or for how long it will produce, depends on the size of the gas pool it has tapped into.

In 2005 there were a total of 35,428 natural gas wells actively producing in the state with just eight of those being unconventional wells.  The peak during the sample was in 2018 when 55,036 wells were producing natural gas.  Of this total 46,638 were conventional and nearly 8,400 were unconventional.  The number of producing conventional wells increased by 32 percent while the number of unconventional wells increased dramatically. 

The number of producing conventional wells fell a bit in 2019 to 45,225 and then slid further to 38,751 in 2020 before rebounding slightly in 2021 to 43,207.  In contrast the total number of producing unconventional wells kept rising, reaching 10,366 in 2021. 

This despite the falling price of natural gas as traded on NYMEX.

Total amount of natural gas produced

In 2005 there were 141.33 million MCF (thousand cubic feet) worth of natural gas pulled from gas wells in the commonwealth.  Just 88,970 MCF (0.06 percent) of the total came from unconventional gas wells.  After a small increase to 164.56 million MCF in 2008, the total production from conventional wells began to decline.  It slipped below 100 million MCF in 2019 (97.46 million) and ultimately fell to 38.82 million in 2020 before rising to 66.61 million MCF in 2021.

Production from unconventional natural gas wells jumped quickly reaching 1,063 million MCF in 2011.  It continued to jump rapidly, hitting 5,057 million MCF in 2016 before reaching 7,506 million MCF in 2021.  The total statewide output of natural gas reached 7,573 million MCF.  Of that total 99.12 percent came from unconventional wells.

Policy implications

At a time when energy has become a focal point in the U.S. economy, Pennsylvania’s production of natural gas can be a tremendous benefit to the state and nation.  Natural gas is used in the manufacture of many products such as plastics, fertilizers, synthetic fibers, cosmetics and medicines.  The cracker plants, like the one under construction in Beaver County, can process the gas to facilitate this type of production.

Manufacturers need a cheap, reliable source of energy to power their plants and help in the manufacturing process.  With a more than abundant supply, Pennsylvania could be attractive to manufacturing firms looking to relocate. 

With a focus on energy production, natural gas can provide a clean burning solution to electricity generation.  Many countries rely on natural gas to power electricity plants.  Pennsylvania could be a major exporter of natural gas.

The key to maximizing the potential of natural gas coming from Pennsylvania is to foster it and not impede it.  That includes allowing the pipeline infrastructure to move the gas from field to hub to market.

Slow Down the Shell Tax Giveaway Train

The Governor’s plan to offer tax credits totaling $1.65 billion to plants, including the proposed Shell ethane using facility, needs to take a breath in its headlong charge toward passage in the Legislature. There are several important questions that need to be answered.

First, why would tax credits be given to a plant likely to be located in a tax free Keystone Opportunity Zone? Under the provisions of the amended Opportunity Zone law, no state taxes or property taxes will be owed for up to 15 years of operation. And if other eligible ethane using plants come, will they insist on having a Keystone Opportunity zone designation at their chosen site?

Second, how can anyone be sure that the optimistic job creation numbers will ever happen? We have seen too many instances where large taxpayer subsidies given to companies have failed to produce anything close to the projected numbers-or where the development failed to last very long such as Volkswagen and the Kvaerner shipyard, or Lazarus or Lord and Taylor.

If other states, such as Ohio or West Virginia, are willing to give the store away to get the Shell plant, why not let them? Pennsylvania has the gas. We could slap a significant severance tax on any gas leaving the state and going to an out of state chemical plant. That might produce enough revenue to allow major cuts in the state’s outrageously high corporate income tax, one of the biggest deterrents to companies locating in the Commonwealth. Making Pennsylvania more business friendly through lower taxes for all companies is far preferable to making the state tax free for some companies. And we still have the drilling related jobs, the royalty and lease payments. Let another state worry about the inevitable environmental lawsuits.

Moreover, what will existing petrochemical or pharmaceutical plants already in the state think about the enormous tax breaks being offered to some newcomers? Will they demand tax breaks as well? Where does it end?

The present effort is not infrastructure enhancing and is not business climate improving. It merely adds to the perception that Pennsylvania is driven by special interests and favored companies. This is the price the state pays for being unwilling to enact Right to Work, repeal the prevailing wage law and adopt a more reasonable regulatory environment.

Opportunity zone tax incentives for blighted and costly-to-rejuvenate areas saddled with toxic waste, rusted out hulks of unusable equipment and buildings are one thing. Tax credits on top of those benefits make no economic sense.

Is the Declining Price of Natural Gas Slowing the Marcellus Boom in the Pittsburgh Area?

A rising tide of natural gas production across the country in recent years has produced what appears to be an imbalance of supply and demand that has caused the price of natural gas to plunge.

The average monthly price of natural gas in 2008 was $8.90 per Mcf. It fell to $4.08 in 2011 and by the end of January it had fallen even further to $2.71 per Mcf. In January some drilling companies announced that they were holding off on drilling new wells as a result of the price decline. In mid-March that price has fallen even further to $2.30 per Mcf. The speculation is that the Marcellus drillers will cut back even further.

And in the Pittsburgh area we may be seeing some of the fallout from this reduced activity in the payroll employment numbers which were just released for January. For the Pittsburgh metropolitan statistical area (MSA) the number of employees on payrolls in the mining and logging sector had risen every month rather steadily throughout 2011 before plateauing at 9,000 from November 2011 through January 2012. But the real impact may be on some of the sectors that had been buoyed by the Marcellus gas boom, specifically the manufacturing industry and the leisure and hospitality industry. Throughout most of 2011 the manufacturing sector had seen year-over-year growth. Beginning in November 2011 the sector experienced its first year-over-year-decline since July 2010. Both December 2011 and January 2012 had year-over-year declines. The leisure and hospitality sector also posted a year-over-year decline in January 2012, their first since May 2010. Is this a signal that the boom is beginning to subside?

While it is certainly too soon to draw any hard conclusions, one thing is certain: the Marcellus Shale boom has had a positive impact on the Pittsburgh region’s economy. If the falling price of gas causes these firms to cut back, it too will be felt in the economy-not just in Pittsburgh, but across the state.

Dousing the Gas Industry

Two negative incidents in the area (one in Clearfield County, one in Moundsville, WV) in recent days related to drilling into the Marcellus Shale certainly aren’t going to help with public relations for the gas industry. Not with the oil leak in the Gulf, not with an ongoing debate in Pennsylvania over whether to tax natural gas extraction.

The company involved in the Clearfield incident has been placed on a suspension by the state’s Department of Environmental Protection, the agency that regulates drilling activity in Pennsylvania. Some want Federal intervention and expanded oversight. Others want a moratorium on all drilling activity statewide.

This raises the question of local government’s place in the equation. State courts have heard cases in recent years over municipalities trying to exert their police power over drilling via the zoning process, and some have passed ordinances designating specific zoning districts for drilling activity. A publication by Penn State University points out that "the ability of municipalities to regulate natural gas exploration is limited by the Oil and Gas Act…[which] preempts a municipality or county from regulating a matter that has been addressed in the act". But it is quite possible that these recent events might raise issues as to the regulatory framework.