American Oil and Gas Reporter - December 2015 - 92

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ConventionCoverage: Pennsylvania Independent Oil & Gas Association

Mergers, A&D Driving Market
Across Appalachian Basin
By Corinne Westeman

MONROEVILLE, PA.-Three oil and
natural gas industry executives predict
2016 will be challenging for the nation's
exploration and extraction sector, but there
should be some signs of relief by 2017-18.
Ken Mariani, president of EnerVest
Ltd.; Joe Frantz, vice president of engineering technology at Range Resources
Corp.; and Craig Neal, vice president of
operations for CNX Gas Co., all participated
in a panel discussion about the industry's
future at both the national and local levels
during the Pennsylvania Independent Oil
& Gas Association's Eastern Oil & Gas
Conference and Trade Show, Oct. 27-28
at the Monroeville Convention Center.
Neal commented that while Appalachia
was a low-cost basin, the region was
challenged by bottlenecking infrastructure.
"Basis discounts to Henry Hub prices
put Appalachian-based companies at a
disadvantage," he said. "We are getting
a portion of our gas to Chicago because
that is a better market as the Northeast
pipelines are over supplied."
Mariani agreed, saying he believed
Michigan was an ideal market as well.
"But the real answer is demand," he reflected. "We have to find ways to increase
demand incrementally."
According to Frantz, approximately 27
billion cubic feet a day of natural gas
pipeline capacity could be coming on line

in Appalachia by 2018. And, if Shell or
others build cracker facilities in the region,
it would create additional markets for ethane.
The three executives agreed that prices
likely would remain bearish until late
2016 or early 2017. Mariani mentioned
industry members should have an idea
how things would look in 2016, as companies have been releasing their budgets
for next year. "If companies spend zero
dollars next year, their base decline probably is going to average 25-30 percent,"
he projected. "It takes a lot of capital to
keep that production flat.
"The underlying issue is to be able to
flip the switch and bring on production,"
Mariani added. "Once prices recover,
what does it take to flip that switch? The
answer is low-cost capital. As an industry,
we have been blessed with low-cost capital;
in fact, it basically has been a curse the
past few years. When prices start increasing, I think we will see whether companies
have the leverage and liquidity to bring
additional production on line."
Both Frantz and Neal said low prices
had created opportunities for companies
to consolidate, merge, or acquire others.
Mariani said some investors "may be a
little gun shy, while others may think it
is a good idea to invest before the pendulum starts swinging back."
"It is going to get worse before it gets
better, and that will create a lot of acquisition
and divestures," Mariani opined. "There

From left, Joe Frantz, vice
president of engineering
technology at Range Resources Corp.; Craig Neal,
vice president of operations
for CNX Gas Co.; and Ken
Mariani, president of EnerVest Ltd., gather at the annual Eastern Oil & Gas Conference and Trade Show's
executive panel. The Pennsylvania Independent Oil &
Gas Association hosted the
executive panel discussion,
where the three discussed
Appalachia's role in energy
development.

92 THE AMERICAN OIL & GAS REPORTER

are two core drivers of A&D activity: Companies need liquid assets so they can reinvest
adequate capital whenever the opportunities
arise; and second is the relationship between
the industry and the banks.
"Spending money on capital is the second priority," he continued. "The first is
making the banks happy, and that is driving
a great deal of A&D-type activity."

Legislative Impacts
Unable to attend in person, Pennsylvania House Speaker Mike Turzai, RAllegheny, updated the PIOGA conference
through video conference on steps he believed the state government would take
over the coming months and years.
Turzai said he had made arguments
on industry's behalf, including:
* Because Pennsylvania has an impact
fee for oil and gas drilling, there is no
need for any severance tax proposal,
which Turzai said he believed would be
a "de facto moratorium" on drilling
activity in the commonwealth.
* Pennsylvania should be focused on
developing more end uses for natural gas.
* Act 13 should not apply to conventional drillers.
"Pennsylvania's tax policy has cost
us thousands of jobs," Turzai stated. "We
need to give local companies a sense of
certainty and predictability, and we cannot
do that if we are constantly changing our
tax policies and expecting some industries
to carry more weight than is their due."
Turzai said his office is "completely
against a severance tax." He said he had
"a good amount of support in the House,"
including a minimum of 10 Democrats
who also opposed a severance tax.
"Instead of arguing about a severance
tax, we should be spending this energy
on improving the permitting process and
developing more intrastate pipelines," he
maintained. "I know the industry supports
both those items, and either would benefit
the commonwealth. Why don't we focus
our efforts on industry issues that are
necessary and supported by both sides?"
Turzai suggested Democratic Governor
Tom Wolf "probably sees the impact of
his policies based on the number of jobs

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