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Pa. shale permitting falls by nearly half YOY in September as drillers hold fire

Permits for shale gas wells in Pennsylvania dropped nearly 50% year over year in September, as four of the state's five top producers try to time a winter market where prices are expected to top $3/MMBtu, about $1/MMBtu more than current prices at the benchmark Henry Hub.

Range Resources Corp. led the state with 13 new permits, all in Washington County south of Pittsburgh, while the nation's largest gas producer, EQT Corp., pulled one permit, compared to 22 a year ago, according to data from the state Department of Environmental Protection Oct. 14. The state's top five producers pulled 23 permits total in September, about one-third of permitting activity in the state. Those same drillers account for two-thirds of Pennsylvania's permits in any given month.

Producers pulled 68 permits in September, a 47% drop from 128 permits issued in September 2019, in what one analyst described as a "prisoner's dilemma." The prisoner's dilemma is a game theory exercise where choices that maximize individual gains end up crippling gains for the whole group.

In essence, Sanford C. Bernstein's Jean Ann Salisbury told clients, the top eight Appalachian gas producers have refrained from jacking up spending and production volumes to capture any expected price increase because when one producer takes those actions, the rest will follow, glutting the market and destroying the premium.

"Historically, Appalachia rigs and Haynesville rigs have ramped when gas price was above $2.50-$3 [/MMBtu] … capital discipline suggests they need greater than $3 today," Salisbury wrote in a Sept. 25 note. "So how high can gas price go next year? Assuming oil price stays flat, it all depends on the prisoner's dilemma of the Appalachian gas producers. If they are smart, they will all talk on the next earnings call how even the $3 curve isn't enough for them to grow (but their hedge book changes may tell the real story). So far this has been the message, and consensus numbers do not expect production growth in 2021."

The number of fresh permits in September was inflated by new permit modifications filed by two supermajors. Exxon Mobil Corp.'s XTO Energy Inc. shale gas unit filed for eight permit modifications in Butler County, north of Pittsburgh, while Chevron Corp. filed for nine permit modifications for wells in Westmoreland County, east of Pittsburgh, wells that EQT may wind up owning if a rumored deal comes to fruition.

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