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Shell Oil fading in the Pennsylvania Marcellus

Shell's Marcellus shale wells underperforming
Shell's Marcellus shale wells underperforming

A new analysis of the second half 2013 Pennsylvania Marcellus shale oil and gas production shows the vast majority of Royal Dutch Shell’s 630 wells are under performing compared to its peers. In northeast Tioga County, Shell’s wells are producing at less than half the rate of its area competitors. Its more bad news for Shell as its new CEO Ben Van Beurden announced on Thursday the company would cut its spending in onshore U.S. operations by 20% and begin selling off assets. Van Beurdan stated, “Overall, we are working through the fundamental shake-up of the resources play portfolio and the way we operate,” Shell’s poor productivity results in the Pennsylvania Marcellus is also potentially bad news for the Corbett Administration which has been trying to close a deal with Shell to locate an ethane cracker plant in Monaca, Pennsylvania north of Pittsburgh.

Independent energy analyst Bill Powers commented on Shell’s Marcellus shale performance stating, “Given that Shell has already spent more than $9 billion dollars to get into the Marcellus and drill over 600 wells over the past few years, their production results must be considered extremely disappointing. According to PA production data, Shell's wells are less than half as productive as one of their major competitors in their area of the Marcellus. More importantly, Shell's wells are likely to be uneconomic even with the recent rise in gas prices.”

Shell purchased its Marcellus shale holdings by buying Terry Pegula’s East Resources Inc. back in 2010 for $4.7 billion. By early 2013, Shell took a $2.1 billion write down on its U.S. shale operations. About 85% of Shell’s shale wells are in the northeast dry gas window of Pennsylvania.

When asked to comment on what he thought of the prospects that Shell will go ahead in Pennsylvania for the proposed ethane cracker plant, Powers stated, “I do not believe that Shell will go forward with building an ethane cracker in Beaver County. According to State data, natural gas liquids production is less than 10,000 barrels a day in Washington County and it is unclear how much ethane will be produced on a long-term basis. Due to the size of the required investment by Shell and the long lead-time, it is easy to understand why the company would be uncomfortable making such a large commitment to the Marcellus given their weak results to date.”

Gov. Corbett appears unfazed by the latest developments in Royal Dutch Shell’s Marcellus productivity results even as the data is posted on his administration’s Department of Environmental Protection web site. On Wednesday of last week, Corbett said he “remains optimistic” Shell will go ahead and build a petrochemical plant in Monaca, Pennsylvania to convert ethane from natural gas into chemicals for the plastics industry. He stated Shell agreed to pay for demolition and remediation work on the site. “There will be probably be more developments between now and the second quarter,” Corbett said, without offering any additional details. The Governor has been trying to bring Shell’s ethane operations to Pennsylvania for over a year and half with more than $1.65 billion in tax breaks, a record for tax breaks in the history of the state.

Royal Dutch Shell and Chesapeake Energy, among others, remain as two companies struggling to make profit on their U.S. shale oil and gas operations. Since 2012, both companies have taken billions in write downs on claimed U.S. shale gas reserves which turned out to be non viable. Both companies have cut back on their drilling operations in the Pennsylvania Marcellus. Chesapeake Energy has been selling off its hard equipment assets at a furious place trying to raise cash to cover its more than $20 billion in total debt. Royal Dutch Shell is now taking a similar asset sale path. Both companies are struggling at a time when U.S. natural gas prices have been on the rise closing yesterday at $4.43 per MBTU, more than double the price of natural gas back in early 2012.

“Shell, similar to CHK (Chesapeake Energy), is likely to drill a lot fewer wells in the Marcellus over the next few years as the companies focus on higher return areas.” commented Powers.

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Disclosure: The writer is not part of any environmental group or “anti-frackers” nor does hold any publically traded stocks in any oil and gas drilling companies. He is not being paid to write by any group nor does he have any financial arrangements with any person or entity listed in this article.

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