• Report Indicates Market Upturn While Regulatory Environment Remains in Flux
  • October 6, 2017
  • PA Business Central

    A recent report indicates that the natural gas industry should expect continued economic gains despite remaining disapproval from local community and regulatory organizations.

    Written by multiple energy and natural resource attorneys from law firm Babst Calland, the report is entitled “Upstream, Midstream and Downstream: Resurgence of the Appalachian Shale Industry; Legal and Regulatory Perspective for Producers and Midstream Operators” and focuses “on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators,” according to a press release from the firm.

    The report is split up into six sections: Business issues, the changing regulatory landscape, pipeline safety legislative and regulatory developments, litigation trends, challenges and debate spawned by local laws and regulations and downstream opportunities.

    “This year’s Babst Calland Report is published at an exciting time for energy in the northeastern United States. The Appalachian Basin has re-emerged to become a leading producer, prices have stabilized, pipeline projects are coming online, and the future of downstream markets is beginning to come into view. Yet, dynamism remains a big part of the story with significant acreage and assets changing hands, new entrants to the upstream and midstream markets, the evolution of energy markets and fuel mixes, and the seemingly never-ending new requirements from the federal, state and local levels of government,” said Kathryn Z. Klaber, The Klaber Group, in her preface to the report.

    Production and prices

    Although natural gas producers saw record low prices in 2016, the end of the year indicated a positive trend upwards that has continued into 2017.

    The report predicts that “modest price stability may be achieved given the prospect of both increased pipeline capacity out of producing regions like Appalachia, as well as some national export capacity. However, it appears that relatively low prices are likely to persist for some period of time with levels of U.S. dry gas production near all-time highs through December 2017.”

    According to the report, the best tactic to adapt is to continue to reduce costs and improve efficiency, while continuing to recognize and seize market opportunities when they are made available.

    Despite annual natural gas production falling in the rest of the country due to low prices in 2016, last year saw increases in drilling efficiency and production in the Marcellus and Utica regions.

    The past year saw a record number of bankruptcies in the industry.

    According to the report, “In the 2016 calendar year, primarily due to low commodity prices, 70 North American oil and gas exploration and production companies filed for bankruptcy protection. This was a significant increase from the 44 companies that filed for bankruptcy protection in 2015. Midstream companies also succumbed to the pressure of falling prices, with 13 filing for bankruptcy protection in 2016, compared to just four filings in 2015.”

    The region also experienced a large amount of mergers and acquisitions in 2016, but the report indicates that there is still opportunity for more activity for players in the region who have the finances to manage it as the past year of financial instability combined with increased efficiencies has made companies both lean and looking for a buyer.

    “Deep pocket” players may continue to have opportunities to purchase assets from bankruptcy sales. Some oil and gas companies that have survived the volatile markets over the last two years have been forced to significantly cut their operating expenses, pay off debt and increase cash flow to survive market conditions. Some companies, now leaner and more productive, may be more attractive for corporate mergers and acquisitions.”

    Regulatory environment

    As always, the industry is caught in a regulatory flux on the local, state and federal levels.

    The change from former-President Obama’s climate policies to Trump’s pro- industry stance has oil and gas firms cautiously optimistic for a future with less oversight and easier permitting, but every action has an equal and opposite reaction.

    “Following the election of President Trump, numerous environmental organizations publicly stated they have seen increases in funding and are increasing personnel to oppose actions expected to be taken by the Trump administration. Environmental organizations have followed through with promises to fight the administration.”

    The state regulatory climate is also keeping the industry from feeling the effects of a federally deregulated industry.

    The report cites Governor Wolf’s methane rule as one example of state regulation holding strong.

    “Despite the recent trend at the federal level, Pennsylvania continues to implement the methane reduction strategy launched by Governor Tom Wolf in early 2016. On February 4, 2017, DEP announced the beginning of a public comment period for an air permitting proposal that, if finalized, would result in significant changes to the status quo for oil and gas industry sources. Among other things, the proposal would narrow the scope of a longstanding air permitting exemption known as Exemption 38, such that it would not apply to new or modified unconventional well sites. Instead, unconventional operators would be required to obtain an air permit prior to constructing, modifying, or operating a well site.”

    Locally, the report also indicates that communities have grown bolder as multiple studies circulate regarding natural gases ill health effects. The authors find the studies suspect, stating “none of this material is based on data of actual air emissions from unconventional natural gas development. A casual review of the material could lead to the erroneous conclusion that air emissions have not been tested; this is not, however, the case. The air quality data collected by a variety of objective parties using established monitoring and testing protocols around shale development in northeastern United States over the last six years demonstrate that shale operations are safe.”

    The report does not mention the effects climate change might be having on the public’s perception of the industry. Natural gas production contributes to carbon pollution when burned and releases methane during drilling and transportation. According to the EPA, methane is more efficient at trapping radiation than carbon dioxide and has comparative impact that is more than 25 times greater over a 100-year period.