One might expect similarities between the country's two lowest cost onshore plays—the Permian Basin and Appalachia. But we're seeing operational leadership take two different trajectories as super-majors take over the Permian in West Texas, and pure plays take over the Marcellus in Appalachia. Our North America plays & basins experts, Reed Olmstead and Imre Kugler join the podcast to discuss. Here's an excerpt of the conversation on our Upstream in Perspective podcast.

Jessica Nelson:

I think it was the Marcellus that got majors excited about unconventionals as what was then Statoil, partnered with Chesapeake back in 2008. Now the majors are all but rounding errors in Marcellus activity levels. What explains the emergence of pure play operators as relative to the disappearance of the majors?

Imre Kugler:

That's a good question. I think you can see there was an excitement among the super-majors early on getting into gas opportunities. But that was all premised on a relatively high gas price, so $7 MMBtu. Gas growth was pretty dramatic. The price got depressed very quickly, and now we're in a $3 price environment.

Reed Olmstead:

It's interesting, because we saw something similar on the oil side, where oil went from $90 down to $28. The divergence of the trajectories is that oil came back. That's when the super-majors got into the Permian Basin. It wasn't at the low point of the price cycle. It was as the price was rebounding. In the Marcellus, the majors got in when things worked at $7. It was great. It might have worked at $4. But when we saw prices go down below $2, it didn't make sense. They got burned. They pulled back and allocated capital other places. We've seen the oil price come back up, and that's been a large draw for the Permian. It's been tested at these low prices and has proved resilient, and so there's less risk in that opportunity for the majors, at this point.

Imre Kugler:

And cost played a key role there, too. There was a disconnect between gas and oil prices for a while, and so that didn't drive all the efficiencies. We realized 2015, 2016, and 2017, because they had low oil and low gas at the same time, so the only way to really survive was to become much more efficient.

Reed Olmstead:

Yeah, which is what really drove the pure plays in the Marcellus. These guys decided we're going to have to work this asset as good as we can. Their pure play is not necessarily by choice, but by fate. They just didn't get out. So, it wasn't that they chose to stay, it's that they didn't choose to get out. Whereas we've seen a different evolution of the Permian Basin, as oil price came back.

Imre Kugler:

Yeah, and that's a good point, too. When you think about the key Marcellus operators, they leased that land 10 years ago. You think about Range, EQT, Cabot, Chief, Southwestern, they've basically been buy and hold. You saw in the Permian all the big, almost breathtaking transactions. Part of the strategy was lease, get some landmen together, and then sell off, even drill some wells, prove it up a bit, sell off again. It was a very different picture.

What's made pure plays successful in Appalachia and is there a path for majors? Listen to the full podcast online.

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Posted 16 April 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.