Half as many natural gas drilling permits were issued during September in Pennsylvania compared with a year ago, indicating a producer response to high production levels and operators' desire to live within their cash flow.
This could be in response to continuing robust gas production in the region, which threatens to drive prices down, as well as an effort to live within cash flow.
Pennsylvania only issued 134 permits to drill gas wells in September 2018, a big drop compared with September 2017, when 264 permits were issued, according to state Department of Environmental Protection data.
The year-on-year decline in Pennsylvania permits issued reflects a general decline in permitting activity across the US Northeast, which could indicate that the years-long Appalachian drilling boom is on the verge of slowing.
Gas drilling in Pennsylvania is focused largely in two opposite corners of the state -- the northeast, which overlies the dry-gas window of the Marcellus Shale, and the southwest, which is situated in the wet-gas segment of the play. Among the counties in the state with the most permitting activity in September were two in the southwestern corner -- Washington, with 24 permits; and Greene, which snagged 17 drilling permits for gas wells. Seven permits were issued for wells in nearby Allegheny County.
The northeastern corner of the state trailed in the number of permits issued, with Lycoming County receiving five and Susquehanna being awarded four permits.
This compares with more robust permitting activity seen in September 2017, particularly in the southwestern part of the state, when 100 permits were issued in Washington County, 33 in Greene County and 22 in Allegheny County. September 2017 also saw more permitting activity in the northeastern counties of Susquehanna, which received 23 permits, and Lycoming, with 10.
CAPITAL DISCIPLINE
The year-on-year decrease in the number of drilling permits issued might reflect producers' commitment to maintain capital discipline. Recent earnings statements show that instead of chasing prices, producers are planning for manageable growth within their cash flow.
The spot price at Dominion Transmission South, a key Pennsylvania pricing point, has paced well above $2/MMBtu for much of the past 11 months, averaging $2.415/MMBtu since November 7, 2017, Platts pricing data shows. Prices for Dominion South could see more of an upward push heading into the winter as pipeline buildout has provided more optionality for Appalachian gas.
In addition, the use of improved drilling technology, such as the drilling of longer-lateral wells, has enabled operators to maintain strong levels of production without having to drill a large number of new wells.
In the company's second-quarter earnings statement, Bill Way, president and CEO of Appalachian producer Southwestern Energy, pointed to greater operational efficiencies and a shift toward greater liquids production as enabling the company to "to generate modest free cash flow in 2018 without raising capital guidance." Pennsylvania gas production has grown apace over the past 12 months. Platts Analytics' sample production in the state averaged 17.5 Bcf/d in September, 2.9 Bcf/d above the same month a year ago.
Another factor that might be contributing to the year-on-year slowdown -- producer preference for completing previously drilled, but uncompleted, wells (DUCs), rather than drilling new wells. In August, the Pennsylvania Independent Fiscal Office released a study that found that in Q2, the number of wells classified as "shut-in" or "spud, but not completed" decreased by 102, or a little more than 6% compared with the previous quarter.
Last year saw an uptick in permitting activity in the US Northeast as operators geared up to increase production in anticipation of a number of pipelines being built to take production out of the basin, according to Platts Analytics.
But this year has seen a downward trend in permitting. But there was an increase in July, which, if one assumes a four- to six-month lag from permit approval to drilling, would make sense given the timing of the new pipeline capacity that is expected to come online in the region in late 2018 or early 2019.
TAKEAWAY CAPACITY INCREASE
Some Appalachian producers also said they plan to bring more wells on line in the second half of 2018 to take advantage of increased takeaway capacity.
In July, producer Cabot Oil and Gas said it planned to place 37 net wells on production in Q3 in conjunction with the in-service date of Transcontinental Gas Pipe Line's Atlantic Sunrise expansion, which was expected to enter service Saturday. The pipeline is expected to provide a significant boost to take-away capacity out of northeastern Pennsylvania, where Cabot has significant operations.
Given that rig activity has been fairly stable and producer guidance suggests there is still room for growth, the decline in permitting activity is not expected to result in a drop in production for the rest of the year, according to Platts Analytics.
