How Does the Oil Price Drop Affect Marcellus Gas?

by Duane Nichols on December 31, 2014

US Crude now at $53.00/bbl

From: Jeanne Williams  Subject: Gas and oil question   Sent: December 29, 2014

Hello to Mon News Editor (Don Strimbeck)

I receive the Mon News through a series of forwards till it finally gets to my inbox. I thought you might be the person to ask this question: We know that the price of oil has fallen and has lots of people shaking in their boots. How does the price of oil affect the price of fracked gas since they are two different commodities and require different infrastructures to be put into use?

In other words, will we see a reduction in fracking here in the Gas Fracking capital of the world? So far I don’t see that happening. In the interest of transparency I will tell you that I have my left foot firmly planted in the “clean environment for all, now and forever camp”.

The little toe on the right foot is in the fracking camp as I do traffic control for a flagging company that works mainly in the gas fields. The pay is good.

Thank you, Sincerely, Jeanne Williams


From: S. Tom Bond  Subject: Gas and oil question   Sent: December 29, 2014

Oil and gas are to some extent competitors, after all, most of the use of both is for energy, although chemical uses of each exist which cannot be easily substituted. So the effect of the price of oil on gas is due to substitution of oil for gas to generate energy. Much of the increased use of gas results from the fact that electrical generating plants were constructed to use primarily coal or oil, but had the capacity to increase production for overloads with gas. They have turned to using overload capacity and reduced the main supply, the oil or coal.

It takes something like $65 to pump oil in the Bakken and $25 to pump it in Saudi Arabia. So low price oil price hurts both fracked oil and, indirectly fracked gas, because less of it will be used.

Some companies will be hurt more than others. If a company (like Exxon) has a lot of business going it is not hurt so badly. If it has the price “hedged” as they say in the stock market (the term means already sold to a third party at a fixed price, who is a gambler, if the price goes above the hedged price he wins, if it goes below he looses) – such as Anterio, which operates in Doddridge and elsewhere in WV, it is not hurt so badly. But if it has extensive debts, like many of the smaller companies and Chesapeake, it is seriously hurt, because they need current income to pay the debt.

They all continue production, but the safer companies don’t invest for the future at the same rate. The companies which lack income from other, less expensive sources really have to cut costs to the bone, sell off holdings or go further in debt (if they can) and cannot resume production quickly if the price of oil goes up again.

Saudi Arabia is taking the blame for not cutting the production of oil. It is said that this is to injure “fracking companies”  which are doing so much production. The fact is that the US really doesn’t have great reserves. They are in the Middle East and Russia. We are simply sucking the soda from a small cup at a faster rate.

There is an undercurrent of analysis which suggests the Saudi’s are cooperating with the US to attack Russia, where the oil and gas a principal source of national income. Russia has so much conventional oil and gas they laugh at the idea of fracking. They have recently opened two huge gas deals with China and have developed overland sales of oil. The next twenty years will be interesting, because geopolitics is almost entirely about how and who will supply energy.

Tom Bond, Retired Chemistry Teacher and Resident Farmer, Lewis County, WV


From: K. Lee Avary Subject: Gas and oil question Sent: December 30, 2014

A lot of variables are part of this equation, some geologic and some economic. When horizontal Marcellus drilling began, gas prices were high and the Marcellus was attractive for operators to develop in the “dry gas” part of the Marcellus. In the last few years, the price of gas has dropped quite a bit, and operators have shifted their drilling to the “wet gas” part of the Marcellus play.

The natural gas liquids (ethane, propane, butane, etc.) provide an income stream beyond just the natural gas revenue. The infrastructure to process the wet gas to separate the liquids has/ is being developed.

An economic driver is leases that are expiring or will expire soon. Operators decide whether to drill or let the leases expire or renew the leases.

Another economic driver is “price hedging” where operators have locked in prices to sell their commodities for a certain price for some future period. This removes some of the short term market fluctuation impact.

There is not much oil produced from the Marcellus; there are more Utica wells that produce oil along with gas.

Lee Avary, Retired Petroleum Geologist, WVGES


See also the Pittsburgh Tribune-Review article “Energy Sector Adjusts to Global Oil Plummet.”

See also:

{ 1 comment… read it below or add one }

Market Realist January 1, 2015 at 11:08 pm

Weather and production levels drive natural gas prices – Market Realist

Natural gas finished 2014 right at $3.00 per million BTU, i.e.
$3.00 per 1000 cubic feet, having fluctuated below this value for the first time since 2012.


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