Oil, gas and plastics hit by COVID-19; producers await rebound
By Chrissy Suttles
As oil and gas producers wrestle with economic uncertainty and price slumps related to COVID-19, industry supporters expect a swift rebound.
Lockdowns in place to combat the pandemic delayed progress on two Appalachian petrochemical facilities, and a global drop in demand has reduced fracking and drilling activities here and across the United States.
Shale production in the Appalachian Basin has slowed by less than 2 percent in recent months, but new figures indicate a sharper drop in the average production of new wells. U.S. Energy Information Administration analysts say nationwide natural gas prices will likely remain below average until business activities resume and production slows at the end of the year.
Kallanish Energy this week reported a 6.8 percent increase in Pennsylvania’s quarterly natural gas production — the lowest statewide growth rate since 2017.
Even pre-pandemic, an abundance of cheap gas produced in the Permian Basin and other shale reserves was flooding the natural gas market and driving prices down. Global energy prices had declined, and Pennsylvania utilities were paying less for natural gas.
Last month, Royal Dutch Shell announced it was selling its Appalachian shale gas holdings in northwestern Pennsylvania for $541 million following steep first-quarter profit hits company leaders attributed to coronavirus shutdowns. But Shell, dissatisfied with results, has been slowly shedding its shale assets in the Appalachian Basin for years alongside Chevron Corp., which announced late last year it was looking to sell Marcellus and Utica shale holdings in the region.
EQT Corp. and Range Resources, the region’s two largest gas drilling companies, announced plans to lower capital spending by $75 million and $90 million this year, respectively; however, both companies still expect to meet annual production goals. EQT plans to temporarily halt production of nearly one-third of its daily natural gas output in Pennsylvania and Ohio until market conditions improve later this year.
“The outlook for natural gas prices later this year and into 2021 has drastically improved since our year-end-call in mid-February,” said Cabot Oil and Gas Corp. CEO Dan Dinges on a recent earnings call, echoing statements made by other regional producers.
Shell remains committed to building its $6 billion ethane cracker plant in Potter Township; the company sold off areas unable to produce ethane, which it plans to convert to plastic pellets at the petrochemical complex. Company leaders have since ramped-up construction at the facility following a months-long virus shutdown, bringing back 300 workers per week.
Shale development has made Pennsylvania the country’s second-largest natural gas producer behind Texas. It’s now responsible for roughly 35 percent of the state’s power generation.
“I think affordable energy will help us grow our economy, not reduce it,” said David Spigelmyer, president of the Pittsburgh-based Marcellus Shale Coalition. “I don’t think it’ll be a flip-the-switch solution, but I do believe the commercial side of our economy will rebound pretty quickly.”
Spigelmyer said re-launching economic activities is key. He’s confident the industry is in a position to bounce back quickly, pointing to billions in new power generation infrastructure statewide and a steep drop in electricity rates linked to cheap natural gas.
“We have nearly 20 percent of America’s natural gas supply in Pennsylvania,” he said. “We’re poised to not only provide abundant and affordable energy, but we can help other countries navigate their way into things we take for granted every day, such as the ability to turn your lights on 24/7, heat your home and cook your food quickly.”
A recent U.S. Chamber of Commerce study predicted a fracking ban in the state would eliminate roughly 609,000 jobs and $261 billion in gross domestic product by 2025. At a Thursday “Think About Energy” webinar, Cabot external affairs director George Stark noted natural gas is involved in “almost every aspect of our daily lives,” including the manufacturing of clothes, food, medicine and even solar panels and wind turbines.
But the pandemic’s hit to fossil fuels has some questioning the future of regional petrochemical production.
Royal Dutch Shell in March announced plans to reduce as much as $4 billion from its operating costs in the next year and drop spending by at least $5 billion, hoping to save as much as $9 billion in pre-tax cash during that time. The company also plans to make “material reductions” in capital spending.
It’s unclear whether this will affect the outcome of Beaver County’s cracker plant, although no changes to the project have been announced.
Analysts at IHS Markit at one time guessed as many as five ethane cracker plants would be built in Appalachia; the region is unlikely to rival plastics hubs like Texas and Louisiana unless more plants are built. The proposed petrochemical plant in Belmont County, Ohio was further delayed due to current economic conditions.
A report released earlier this month by the Center for International Environmental Law, a Washington D.C.-based environmental firm, suggests a global oversupply of plastics is smothering demand and causing potential developers to reconsider building in Appalachia.
As the pandemic, at least temporarily, tightens major producers’ cash flow, and bans on single-use consumer plastic grow in popularity, CIEL staff attorney Steven Feit argues the virus spotlighted oil and gas’ “underlying structural weaknesses.”
“We wanted to take a broad look at the trends that seem to be converging on one conclusion: That COVID-19 was bad for the oil, gas and petrochemical sectors,” he said.
Jacquelyn Bonomo, president and CEO of PennFuture, agrees with Feit’s assessment that the pandemic further exposed inherent flaws in fossil fuels.
She wants to see Pennsylvania rely less on fossil fuels and more on renewable energy. The International Energy Agency estimates that while global energy demand is expected to drop by 6 percent in 2020, demand for renewable energy is expected to grow 1 percent over last year due to a 5 percent spike in use.
Nearly 3.4 million Americans worked in clean energy before the pandemic hit. The U.S. consumed more energy from renewable sources than coal for the first time in more than 130 years in 2019, according to new data from the federal Energy Information Agency.
But roughly 600,000 clean energy jobs were lost during COVID-19, and the industry has been largely excluded from federal stimulus bills. Pennsylvania lost the seventh-most clean energy jobs in the nation, or more than 21,000.
Some studies suggest renewable energy in the past few years directly and indirectly generated up to three times as many jobs as fossil fuels.
“In the last five years alone, more than 200 drilling companies have gone bankrupt, while new petrochemical projects have been delayed or abandoned across the country,” she said. “These industries are lobbying intensely for coronavirus-related stimulus and recovery funds, which would be akin to throwing money down a hole at a time when every dollar needs to be used effectively and thoughtfully.”
Plastics manufacturers for months have said their product is essential to fighting the pandemic, noting an increase in the production of face shields, medical equipment and single-use packaging.
Although producers expect the demand for single-use plastics to remain high as hospitals continue to combat the pandemic, travel restrictions, business closures and event postponements are a drag on manufacturers.
American Chemistry Council representatives say demand for plastics will rise as countries expand their middle class. Existing consumer plastic bans are sparse, and plastic use in construction and similar industries is still on the rise.
As for Beaver County’s ethane cracker plant, Spigelmyer said the state’s “world-class ethane supply” will inevitably lead to more growth.
“From what I understand, (Shell) could be doing testing on the plant as early as this Fall or Winter,” he said. “I think everyone’s major investment platform has been suspended for a period of time, but there will be additional petrochemical facilities built in the region.”