Marcellus Gas Output Jumps Despite Low Price

on September 12, 2012 at 8:30 AM

The Marcellus Shale is living up to its promise.

The biggest portion of the massive Appalachian gas field – that underlying Pennsylvania – produced 895 billion cubic feet of gas in the first half of 2012, more than twice as much as it did a year earlier, and 42 percent more than in the second half of last year.

Despite natural gas prices near their lowest in a decade, the Marcellus produced 1.525 trillion cubic feet of gas in the year ending June 30, 2012, doubling the output of the previous 12-month period, and now has about 2,700 active wells compared with some 1,100 in mid-2011, according to Pennsylvania’s Department of Environmental Protection.

Production from the field – concentrated in Pennsylvania but extending to West Virginia and parts of surrounding states – appears to have survived the slump in market prices because of a combination of low breakeven prices, lease obligations, and hundreds of previously drilled wells that are only beginning to come online as new pipeline is built.

The fact that the construction of gathering lines has lagged well development points to further strong gains in Marcellus output, according to Bentek Energy. The consultancy estimates that more than 1,000 Pennsylvania wells drilled during the last 18 months are waiting to come online, and forecast a 78 percent increase in gas production over the next three years as the backlog of wells becomes productive.

According to the DEP, the disparity between drilled and producing wells is even greater. Of 5,900 unconventional wells that have been drilled in the Pennsylvania Marcellus since the shale boom began in 2008, 2,875 reported production in the first half of 2012.

“The issue is one of timing and infrastructure,” wrote DEP spokesman Kevin Sunday, in an email. “The logistics of developing the existing network of gathering and transmission lines are a challenge for some operators and explain why it can be some time for a drilled well to be completed.”

The latest strong increases in Marcellus production, and the expectation of more to come, bear out predictions of enormous reserves of gas that sparked the field’s development starting in 2008, and prompted forecasts that it could meet U.S. gas needs for decades.

Cheerleaders include the Pittsburgh-based Marcellus Shale Coalition, an industry group, whose president, Kathyn Klaber, called the latest production figures “nothing short of staggering.”

Terry Engelder, a Penn State University geosciences professor whose 2008 estimate of the amount of gas in the Marcellus helped to spark the drilling boom, attributed the continuing production gains to gas that is now coming on line as new gathering lines are built, and to energy companies’ need to drill a minimum number of wells in order to hold leases, even though the economics of doing so are challenging in the current market.

The current futures price of $2.77 per million BTU, while above a decade low of $1.97 reached in April, is below most estimates of breakeven for the Marcellus. An estimate from the gas storage and distribution company Spectra Energy in April put the breakeven price for Pennsylvania’s central Marcellus region at $4.26 and that for the northeastern part of the state at $3.44. Still, a June estimate from the energy consultant Enercom put the Marcellus breakeven price at $2.88, in line with the current market, and lower than that for the Haynesville, Woodford and Fayetteville shales.

Engelder said the latest production numbers are consistent with his estimate that the Marcellus contains 489 trillion cubic feet of technically recoverable gas – or about enough to satisfy total U.S. needs for 20 years at current consumption. But he cautioned that his projection was made without regard to price. At the current price, the amount of recoverable gas in the field is “nowhere near” his estimate, he told Breaking Energy.

Michael Lynch, president of Strategic Energy and Economic Research, a consultancy, said Marcellus production could have been expected to decline given the market price.

“You would have thought that the price would have had an impact but we have not seen it,” he said.