The Utica and Marcellus Shale Plays have been greatly affected by the record low oil and gas prices. After recently attending the 6th Annual Law of Shale Plays Conference in Pittsburgh, Pennsylvania, I returned with the following takeaways regarding the current and future state of the shale industry with regard to Upstream and Midstream issues.
Cheap oil and natural gas prices have led the Exploration and Production Companies (E&Ps) to drastically cut their operational expenditures and operating rigs. The E&Ps expect quality abstracting and legal services, including title opinions, at a lower cost than in years past. In turn, in-house title departments, outside land management companies, and law firms are being asked to adapt to this changing environment to meet the current economic needs of the E&Ps.
Furthermore, the downturn in the price of oil and natural gas has affected the profitability of many E&Ps. Unprofitable E&Ps are looking to sell off assets, enter into mergers, joint operating agreements and development agreements, and in some extreme instances, file for bankruptcy. Today, the profitable E&Ps are well positioned to acquire lands in the Utica and Marcellus Shale Plays at a fraction of the cost.
The sudden and rapid production of natural gas has led to oversupply throughout the Appalachian basin. Current pricing for natural gas within the basin is actually lower than the stated pricing on exchanges like NYMEX. This “negative basis” is creating huge demand for new pipelines to transport gas out of the region. To date, there are numerous pipeline proposals in the works that could help alleviate this issue, in addition to the growing trend of reversing the flow of pipelines already in place.
- Going forward
E&Ps face many challenges in the months ahead. Strong balance sheets will be at a premium and the M&A activity will likely increase. Hopefully, this period of volatility will be brief as the industry looks for price recovery towards the end of 2015. This should be a busy time for the accountants, lawyers and bankers!