COVID-19 and Pennsylvania’s Oil and Gas Development Impacts

 

The story of the collapse of oil and natural gas prices since February 2020 is all too familiar: major players like Saudi Arabia and Russia are seeing over-supply, oil prices below $0.00/barrel, layoffs, reduced demand, and storage facilities full to the brim.

 

A huge driver of gas demand for U.S. production, including a large chunk of the Appalachian Basin outflows, are liquified natural gas (LNG) exports. These have dramatically slowed as economics for U.S. exports have collapsed. Export cargo shipments are being routinely canceled, reportedly 40-45 ship cargoes for August loading alone, and utilization of some Gulf Coast liquefaction and export terminals appears to have dropped to as low as 50% in May. Liquified natural gas exports, a big positive influence on prices, have dropped significantly.

 

 

So what has this meant on a more regional basis, specifically the Appalachia Basin and Pennsylvania? Negative job impacts in Pennsylvania’s oil and gas drilling industry started long before COVID-19 was a concern. The bounty of Marcellus and Utica Shales, along with other natural gas drilling basins across the US has led to an oversupply, under-utilization, and a slow four-year slide in natural gas prices. In the Pittsburgh area alone, large oil and gas companies had laid-off over 400 employees in 2019 mostly due to depressed energy prices, specifically natural gas. Royal Dutch Shell recently sold off its Appalachian shale gas leases in northwestern PA. Thailand based PTT Global Chemical’s long-awaited decision to build an ethane cracker across the state line in Ohio has been put on hold until at least next year. COVID-19 then topped this over-abundance and low prices off.

 

Thankfully, there are small glimmers of light. As this is being written, Pennsylvania is still the nation’s second-largest natural gas producer, only trailing Texas. The percentage of natural gas being used to produce electricity has been climbing in the Commonwealth and is now responsible for 35% of production.

 

However, Kallanish Energy recently reported a 6.8% increase in Pennsylvania’s quarterly natural gas production — the lowest statewide growth rate since 2017.

 

The Appalachian Basin has taken as a whole still has the most hydraulic fracturing activity in the country. That’s employment. And with the subject of employment, independent estimates and those of the U.S. Bureau of Labor Statistics report that nationally, more than 100,000 jobs have been lost since the pandemic in the oil and gas energy sector. New estimates from the PA Bureau of Labor Statistics are not yet out, however, some analysts are suggesting that between 10-20% of the 32,000 employed in the June 2019 report have been lost in Pennsylvania. And the number of employees since the June 2019 report was already down before the pandemic due to depressed prices and reductions already being made in the industry.

 

From the perspective of lost wages, according to an analysis of data from the Bureau of Labor Statistics for Pennsylvania, in the first half of 2019, workers in the shale industry and related sectors on average earned $2,128 a week, almost twice the average for private-sector workers in the state.

 

Budgeted capital expenditures (capex), dollars spent primarily on exploration and production, by the largest energy exploration companies in the Appalachian Basin have been reduced significantly since 2019. Several of the big players have announced major reductions in spending for 2020; Range Resources dropped from $720 million to $520 million, Cabot from about $825 million to $575 million, and EQT from about $1.9 billion to $1.3 billion. These reductions in drilling and exploration mean less dollars spent in the communities for goods and services, and it reflects a reduction of about 8 full-time employees for every $1 million in spending reduction.

 

On a national level, there were 339 rotary drilling rigs operat­ing in the U.S. for the week of May 15, 2020 accord­ing to the Baker Hughes Rig Count, down from 987 one year ago. And nationally there was a drop in the number of started frac operations from 1,238 in February 2020 to fewer than 330 for May 2020, accord­ing to a Rystad Energy analysis.

 

This means less wells being drilled. One measure of that is the number of drilling rigs operating in the State. In Pennsylvania, where the number of working rigs YTD 2019 ranged from 44 to 49, has dropped to primarily 24 working rigs per week YTD 2020. The number of drill rigs in the Appalachia Basin (Marcellus/Utica) are down 48% from peak 2019 levels.

 

This drill rig reduction is also reflected in the number of wells drilled. The total number of wells drilled in Pennsylvania fell by 20%, from 215 YTD through April 13, 2019, to 171 April 18, 2020.

 

Our local community governments will also feel the pinch of the reduced activity in this energy development and depressed natural gas and oil prices. The Pennsylvania Act 13 Impact Fee is the annual fee that the state applies to each new unconventional well drilled into the Marcellus shale. Some of the money is distributed directly to counties to offset the costs of increased drilling activity. Some is made available to individual communities through grants. Local townships have used these funds to develop recreational opportunities, purchase equipment, and save as a contingency fund.

 

The 2019 Impact Fee must be paid by natural gas producers by April 1 and will be disbursed by the Pennsylvania Public Utility Commission in July.

 

On June 17, 2020, the Public Utility Commission posted detailed information about the distribution of CY 2019 Act 13 drilling impact fees on natural gas producers – totaling $200,364,500. The $200.3 million in revenue is a sharp drop from CY 2018 revenue which totaled $251.8 million.

 

 

Bringing the discussion of dollars and cents to the individual, natural gas royalties paid to landowners based on the energy extracted from their property will see a reduction in 2020. Royalties are paid based on the volume of natural gas extracted and the market price of the gas. Pennsylvania law mandates a minimum royalty rate of 12.5 percent of the market value of the sale. Research finds that the average royalty rate in Pennsylvania is 13.5 percent.

 

Pennsylvania’s Independent Fiscal Office, in their January 2020 Research Brief, estimates that between 2010 and 2018 over $10 billion in royalties were paid to Pennsylvania landowners. This personal revenue went directly into the pockets of individuals who made local purchases, invested in property upgrades, equipment, and invested in savings. As the following table demonstrates, it is estimated that PA landowners received $1,785,000,000 in royalties during 2018. Due to depressed natural gas prices during 2019-2020, it is estimated that 2020 royalty payments will be reduced by 40-50% from 2018. This is substantial lost revenue that will never be spent in the local hardware or diner.

 

 

 

The oil and gas energy development industry in Pennsylvania and the Appalachian Basin were directly impacted by the already depressed commodity prices lingering through 2019 and into 2020. This was brought about by a global oversupply aggravated by trade wars between energy-producing nations. Then COVID-19 further reduced industrial use, travel fuel consumption, and the unprecedented rising unemployment.