The most recent report from the Pennsylvania Independent Fiscal Office doesn’t paint a rosy picture for natural gas production and prices in the state, but help could be on the horizon.
The third-quarter natural gas production report indicates that while natural gas production continued to grow, it was at a rate of just 2 percent, the lowest on record. “Year-over-year production growth has decelerated over the last five quarters after very strong gains from the first quarter of 2018 to the second quarter of 2019,” the report states. “Furthermore, total production in September declined by 1.3 percent from September 2019, the first year-over-year decline in monthly production since February 2017.”
The report also determined that natural gas prices have been declining “dramatically” over the last four quarters. From the second quarter of 2019 to the third quarter of 2020, the Pennsylvania average price declined by 42.4 percent, or from a Pa. average of $2.14 per MMBtu in the second quarter of 2019 to $1.23 in the third quarter of 2020.
The downward trend in prices is due to an oversupply from the abundant production in the Marcellus play, which has outstripped demand. That began before the COVID-19 pandemic upended the economy, and has only exacerbated the trend.
There were 111 new horizontal wells “spud”, or begun, in the third quarter, the sixth consecutive quarter of decline and lowest number since 2016.
Low prices have led some major gas producers in the area, including EQT and Range, to temporarily “shut in” production to reduce the amount of gas going to market, in the hopes that prices will rebound as the winter heating season begins and the economy rebounds.
And that may be the case, as natural gas prices have begun to rise, with the U.S. Energy Information Agency reporting gas futures of $2.88 per MMBtu at the end of November. That could lead to more natural gas development, although some executives have said they anticipate keeping production at current or “maintenance” levels.
“EIA expects Henry Hub spot prices to rise to a monthly average of $3.42/MMBtu in January 2021 because of rising domestic demand for natural gas for space heating, rising U.S. liquefied natural gas (LNG) exports, and reduced production,” the EIA said in its most recent short-term energy outlook. EIA expects that monthly average spot prices will remain higher than $3.00 per MMBtu throughout 2021.
However, the agency also said it expects total natural gas consumption to decline 5.2 percent in 2021 as a result of rising natural gas prices that will reduce demand for natural gas in the electric power sector.
With minimal growth in natural gas drilling and production in this area, and the recent drop in prices, the state and its municipalities can also expect less in Act 13 impact fee revenue paid by gas companies and will need to budget accordingly.