{"id":58,"date":"2012-01-24T04:05:59","date_gmt":"2012-01-24T04:05:59","guid":{"rendered":"http:\/\/saunderslawllc.com\/blog\/?p=58"},"modified":"2012-04-01T03:04:23","modified_gmt":"2012-04-01T03:04:23","slug":"doe-agency-cites-precipitous-downgrade-in-marcellus-reserves","status":"publish","type":"post","link":"https:\/\/saunderslawllc.com\/blog\/2012\/01\/doe-agency-cites-precipitous-downgrade-in-marcellus-reserves\/","title":{"rendered":"DOE Agency Announces Precipitous Downgrade In Marcellus Shale Reserves"},"content":{"rendered":"

Yesterday the U. S. Energy Information Administration issued its 2012 Annual Energy Outlook<\/em> (AEO2012) Early Release Reference case which provides updated projections for U.S. energy markets through 2035. Of interest to those following the progress of the natural gas development in the Marcellus Shale, the report included a significant downward revision to the Government\u2019s estimate of the unproven technical recoverable resource (TRR) for unconventional shale gas in the U.S. from 827 trillion cubic feet in its\u00a0AEO2011, to 482 trillion cubic feet.\u00a0 According to the\u00a0AEO2012<\/a>\u00a0\u201c[t]he decline largely reflects a decrease in the estimate for the Marcellus shale, from 410 trillion cubic feet to 141 trillion cubic feet. Both EIA and USGS have recently made significant [negative] revisions to their TRR estimates for the Marcellus shale.\u201d<\/p>\n

Two of Pennsylvania\u2019s largest daily newspapers, \u00ad<\/span>the\u00a0Pittsburgh Post-Gazette<\/a>\u00a0and the\u00a0Pittsburgh Tribune-Review<\/a> reported on this story today and while each cited optimistic overall projections for the increased production of natural gas in the coming decades resulting in the United States becoming a net exporter of liquid natural gas (LNG) by 2016 and an overall net exporter of natural gas by 2021, there are also some worrisome signs for development in the Marcellus region for the foreseeable future.<\/p>\n

While both articles quoted \u201cindustry experts\u201d as questioning the validity of and the reasonable inferences to be drawn from the EIA’s downward Marcellus shale projection, a 66% drop in the TRR does not offer short and possibly intermediate term encouragement for many Pennsylvania gas lease holders who are receiving or anticipating royalty income.\u00a0 This news comes immediately on the heels of major announcements by industry titans EQT and Chesapeake of plans to cut back on shale gas development in 2012.<\/p>\n

In particular,\u00a0Chesapeake’s announcement<\/a> on Monday that it is reducing its \u201cdry gas\u201d drilling capital expenditures by 70% and refocusing on the\u00a0more profitable liquid rich plays (to the tune of 85% of its total net operating drilling capital expenditures) is not good news for landowner\/lessors in the Commonwealth.\u00a0Given that most of Chesapeake’s leasehold interest in Pennsylvania is in the dry gas portion of the Marcellus and that as a result it is shifting its focus to the Utica Shale where it also has significant holdings, Ohio is gearing up for significant natural gas development activity.<\/p>\n

The\u00a0Pittsburgh Post-Gazette<\/a>\u00a0cites the AEO2012 as projecting natural gas to trade no higher than $5.00 per thousand cubic feet through 2023 and while that is roughly double the current price at $2.30\/Mcf (a ten-year low), $5.00\/Mcf is presently about the level at which gas would have to trade for many E&P companies\u00a0to view production as \u201cprofitable.\u201d\u00a0 Natural gas prices are significantly impacted by weather (which is not cooperating from a price standpoint), and the economy (which is not cooperating period), so a change in either (preferably the U.S. financial position) could alter the prospects for production of natural gas in Pennsylvania to return to the lofty heights achieved in the past year.<\/p>\n

There\u2019s always a silver lining in this blog and the good word for today \u2013 at least for landowners whose leases are held by Chesapeake – is \u201cexpiration,\u201d as in leases that were negotiated years ago and are nearing the end of their respective primary terms.\u00a0If Chesapeake is going to relocate 50% of its drilling rigs from Pennsylvania it stands to reason that those remaining will be working overtime to complete as many vertical wells in order to \u201chold by production\u201d as much of its undeveloped acreage as possible.\u00a0However, if land under lease with\u00a0Chesapeake is outside\u00a0of its “sweet spots” – all of Bradford and\u00a0most of Tioga and\u00a0Susquehanna Counties – the company may not act to perpetuate your lease based on a cost-benefit analysis of where its reduced development dollars\u00a0can most profitably be spent.<\/p>\n

Of course, drilling is not the only way a lessee can extend\u00a0a lease (a subject\u00a0which I just addressed at a conference of the Pennsylvania Bar today) so lessors should be examining their leases’ habendum and force majeure clauses, among others.\u00a0I will be\u00a0blogging on this topic next week.\u00a0Some lessors may be able to shed early12.5% leases and look forward\u00a0to the prospect of a growing economy, increased natural gas prices and a return to the lease bonus amounts paid and royalty rates offered\u00a0in 2009 and 2010.<\/p>\n

So to all my current and future clients, get out your gas leases and bring them in (or email them) so we can evaluate your prospects.\u00a0And to all Pennsylvania homeowners who don\u2019t have gas leases, but who heat with natural gas, here\u2019s to prices remaining under $3.00\/Mcf.<\/p>\n