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Shortage of Rigs Slows Natural Gas Exploration, Keeps Prices High

Posted on: Thursday, 22 September 2005, 18:00 CDT

Sep. 22--Even before Hurricane Katrina wrecked Gulf Coast energy facilities, natural gas supplies were tight and prices were high. So you would think the disaster would spur local gas exploration.

So far, that hasn't happened, and the main reason is a shortage of drilling rigs.

"Hurricane or no hurricane, I don't see an impact on drilling in Pennsylvania," said Dr. Robert Watson, an associate professor in petroleum and natural gas engineering at Pennsylvania State University.

But continued high prices should eventually spur "even more activity in Western Pennsylvania," said Jeff Eshelman, of the Independent Petroleum Association of America.

For now, S.W. Jack Drilling Co. in Indiana has been runnings its 16 rigs at full capacity for 18 months.

It takes about a year to buy and construct a new rig and eight months to get an old rig refurbished, said company President Jim McElwain.

Rigs weren't being built or replaced because gas prices were low. From 1980 to 2000, the spot price of natural gas varied from $1.50 to $2.50 per million British Thermal Units.

Then the price started to climb.

It began this year at $5.53 per million BTUs, ran up to $9.86 before Katrina reached the Gulf Coast and hit $12.25 on Monday.

Producers get a bit less than the spot price because gas is measured differently at the wellhead.

The state Department of Environmental Protection expects to issue about 4,000 drilling permits this year, compared to fewer than 500 a decade ago.

"What you drill depends on price," said Terrence Jacobs, president of Penneco Gas & Oil in Delmont. "Five years ago we were trying to find 200 million cubic feet reserves at 3,100 feet. Now we look for 100 million cubic feet reserves at 3,500 to 4,000 feet. With the price of gas north of eight bucks, it makes a lot of sense."

It has become common to see gas wells on public parks, cemeteries and golf courses. Fifty-three wells were drilled last year and 55 so far this year in Allegheny County, according to the state Department of Environmental Protection. Fayette, Armstrong, Indiana and Westmoreland are the hot spots, each with several hundred new wells.

Pennsylvania gas fields tend to be small. The state is ranked fourth in new wells drilled but 16th in the volume of gas extracted, according to Eshelman.

Western Pennsylvania produces about 40 percent of the natural gas it consumes and imports the rest from West Virginia, the Gulf, Texas and Canada.

Katrina disrupted the equivalent of 2.5 percent of the Gulf's annual production.

"That's a lot," said Jacobs. "When you're teetering on the edge between supply and demand, 2 percent throws it out of balance."

A harsh winter would further stress supplies and jack up prices.

That might persuade lawmakers to remove restrictions on oil and gas exploration on state lands in Pennsylvania and the eastern Gulf of Mexico, the continental shelves, Alaska and Inter-mountain West.

"Capital Hill will recognize that we can't become too dependent on any one energy source, any one country or any one region of the country," Eshelman said.

But the industry worries that shortages will spur more regulation.

In the 1970s, noted McElwain, the government reacted to shortages by regulating prices. That discouraged new gas exploration and led to a collapse from which the industry is still recovering. That's why there are one-third as many drilling rigs as 25 years ago.

The government has reacted to Katrina by easing environmental regulations, releasing strategic reserves and allowing prices to seek their natural levels.

But a harsh winter and acute shortages could lead to calls for price regulation.

High prices also undermine demand. Factories close and move overseas. Consumers cut back and switch to alternative energy sources.

"What we want is stability," said Penneco's Jacobs.

Inevitably, rising prices spur exploration. Drilling rigs are built. More people choose careers in geology and oil and gas engineering. Pipelines are built. Investors risk capital on more difficult locations.

Lifting environmental restrictions, Eshelman said, would generate new supplies in one to 10 years, depending on the local infrastructure.

The solution to tight supplies, he said, rests with Congress.

"Are we going to open up new land on-shore and off-shore? Only they can do it."

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Source: Pittsburgh Post-Gazette

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