Low Natural Gas Prices Lead to Production, Drilling Cuts

While natural gas production in Pennsylvania rose by 1% in 2023 over the previous year, the number of new horizontal wells drilled was at its lowest in the past decade.

The observations were made in a recent Independent Fiscal Office natural gas update for the fourth quarter of 2023. Natural gas production in 2023 was 7,520 billion cubic feet (Bcf), slightly more than in 2022, but below the 7,563 Bcf produced in 2021.

The report also indicated that the average Pennsylvania spot price of natural gas was $1.68 per million British thermal units (MMBtu) in 2023, down almost 70% from the $5.58 average price a year earlier. That price has continued to drop, with the U.S. Energy Information Agency recently reporting that the Henry Hub daily natural gas price averaged $1.50 per MMBtu in late February, which represents the lowest price since at least 1997. The low prices have been driven by oversupply, high inventory levels, and mild winter weather.

The combination of fewer wells drilled and low prices is a bad indication for impact fees paid by natural gas producers in 2024, since the formula set by Act 13 for determining the amount of those fees takes into account both the number of new wells spud, the age of the wells, and the price of natural gas. Impact fees have been on a roller coaster ride in recent years, as the price of gas skyrocketed before falling back to earth. The IFO late last year estimated that 2023 impact fees, part of which are distributed to counties and municipalities, would fall substantially from a record high a year earlier.

The lower prices have led some large drilling companies to temporarily cut production or reduce capital spending on new wells. Pittsburgh-based EQT recently announced it planned to curtail 1 Bcf a day of production due to low prices resulting from the warm weather and high storage inventories. It plans to reassess market conditions after March. Southpointe-based CNX also announced it will delay completion on 11 Marcellus Shale wells “to avoid bringing incremental volumes into the market in the current oversupplied market.” Chesapeake Energy has lowered its expected capital expenditures.

The natural gas market can be volatile as it feels the effects of weather, natural disasters, political turmoil and international energy decisions. State and local leaders whose communities receive impact fees must keep this in mind and realize that expected impact fee amounts can change substantially year to year.