What Happens If Energy Prices Drop?

I understand that high and rising energy costs provide a healthy profit incentive for Marcellus exploration, drilling and production, but how (in specific terms) would the Marcellus boom be affected if natural gas and/or crude oil prices were to drop, like in late 2008/early 2009?

 

Let's say we experience another wave of a bank failures, leading to another recession and crude oil prices hit $40-$50 barrel, along w/lower natural gas prices:

 

Do companies stop new drilling projects? Are existing gas wells taken offline or idled? Are industry layoffs to be expected? How was the industry affected (in specific terms) by the late 2008 energy price plunge?

 

Thanks :)

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Permalink Reply by gary smith on October 21, 2011 at 12:33am
i believe i read somewhere that prices would have to go below 60 a barrel for oil for shale drilling to stop.  for oil.  the companies are already moving focus to the oil shale from the dry gas.
Permalink Reply by william r rinehart on October 21, 2011 at 4:51am
All price drops in energy prices is temp., prices will always go higher, unless someone can develop an alternative energy.
Permalink Reply by Frank Walker on October 22, 2011 at 8:12am

You're right.  But the problem in the Marcellus is:  How long is temporary?

If that "temporary" steep falloff in natural gas price happens to coincide with the first year of your unit's production, well, that can be a really expensive and unhappy coincidence for the landowner!!

And there's no way you're ever going to get the lost money back, even if natural gas prices skyrocket a few years later. 

Permalink Reply by JesseC on October 22, 2011 at 12:07pm

If we experience another recession, which I believe is the most likely scenario, we could experience a true modern depression, as outlandish as it may sound. A strong recession/depression can cause energy prices to languish at very low levels for many years.

 

China is experiencing a major bubble economy right now. I believe our next economic shock will pop their bubble and bring down energy prices.

2s72s0k9mm8gdPermalink Reply by 2s72s0k9mm8gd on October 22, 2011 at 7:12am

I heard once that gas had to be $4.00 mcf to be profitable but here it is ,below that, and the drilling continues!

Anyone else have any info on this?

Permalink Reply by Jim Litwinowicz on October 22, 2011 at 11:00am

Last year the CHK CEO said they break even at $2.60/MCF  Somewhere I read that $2.40 was the break even point. But it really depends on cost of drilling, how much comes out of the well, costs of production, % of royalty paid to greedy landowners :>{) , and more.

The current price is low.  Thats why CHK has said they are getting out of pure gas plays and are concentrating on wet gas/oil areas like the Ohio Utica.  Some companies may slow down leasing in the East and move to the Bakken or Eagle Ford.

But other companies have a bit of a quandry...stop drilling until gas goes up and risk losing leases that they paid tens of millions for ...or keep drilling at break-even costs or even below that in order to hold leases until prices rebound.

They may be assuming that prices will go up some as more industry, especially electrical generation, switches to nat gas.  CHK has even started a program to switch all their vehicles and stationary equipment to nat gas, invest in new CNG technologies, and install 150 CNG fueling stations at truck stops across America. They hope to drive up demand and support better prices.

Permalink Reply by JesseC on October 22, 2011 at 12:11pm
Interesting info, Jim. I wonder if drilling is continuing in spite of low prices because energy companies may have hedged (using natural gas futures & options) at higher prices. They may also be drilling in anticipation of higher prices and due to Chinese growth, etc. The problem is that China 's boom is actually a bubble, based on my extensive analysis.
Permalink Reply by JesseC on October 22, 2011 at 12:14pm

I look at many shale gas company stocks (Range Resources, Magnum Hunter Resource, etc) and I'm seeing negative earnings ie they're losing money, at least currently:

 

Range Resources stock on Yahoo! Finance

Permalink Reply by paleface on October 22, 2011 at 1:29pm
I think this is the situation where the big fish buy up the smaller ones,the big players EXXON,SHELL,CHEVRON they have other plays all over the world that are more profitable they can fall back on,but the small and mid cap companys don't have the working capitol to make it through these times,if prices stay up they are ok but when they drop like they are now they can't hang in there. Just my thinking on it,
2s72s0k9mm8gdPermalink Reply by 2s72s0k9mm8gd on October 22, 2011 at 2:17pm

Interesting concept Paleface. Maybe best to sign with one of the big boys then? Would these big companies be above flooding the market with enough gas to drive down prices to the level necessary to put these small guys out of business.........?

Permalink Reply by paleface on October 22, 2011 at 3:04pm
Glenn that makes sense to me, I think when they get enough control than the prices will go up. I think chesapeake is gonna be alright if ohio shale pays off for them.
Permalink Reply by JesseC on October 22, 2011 at 3:16pm
I agree. I'm sure if there's a downturn in energy prices and energy stock prices, Big Oil will swoop right in and do takeovers.

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