Marcellus shale activity cools a bit

Three out of four wells drilled in the Marcellus today are natural gas wells, and gas prices have hit rock bottom. This does not make for good economics.

For the past several years, you could fairly characterize the Marcellus shale play as "hot." Not so much anymore. The neighboring Utica shale is hot, and so are several additional North American resource plays, including the Eagle Ford shale in South Texas and the Niobrara in the Rocky Mountain region. There is increasing interest in the Mississippian play (Oklahoma and Kansas) and the emerging Tuscaloosa marine shale (South Louisiana) as well. The Permian Basin is another hot spot.

One way to determine the degree of "hotness" of a play is the number of press releases that companies send out about it. For the Marcellus, this has slowed to a trickle in the past year. Most of the press releases we've seen are related to midstream infrastructure rather than drilling. The reason for this apparent slowdown in activity is because the Marcellus is mainly a gas play. Three out of four wells drilled in the Marcellus today are natural gas wells, and gas prices have hit rock bottom (we hope). This does not make for good economics. Many are drilling simply because the leaseholds are held by production, and it is required under terms of the lease agreements.

That said, the Marcellus remains a gem among North American shale plays due to its proximity to East Coast markets and its relatively shallow (i.e. inexpensive) wells. When new processing infrastructure and increased pipeline capacity go on stream over the next several years, we will see an increased level of activity in the Marcellus, especially if new areas, such as the state of New York, are opened to drilling.

Recent activity

• Crestwood Midstream Partners LP and Crestwood Holdings Partners LLC have formed a joint venture (Crestwood Marcellus Midstream) and have acquired Antero Resources Appalachian Corp.'s gathering system assets in West Virginia for $375 million in cash, plus an earn-out that allows Antero to earn additional purchase price payments up to $40 million based upon annual production levels achieved during 2012 and 2013. The gathering lines deliver production to various regional pipeline systems, including Columbia, Dominion, and Equitrans. Later this year, they will begin deliveries to intermediate systems that will connect to MarkWest Energy Partners' Sherwood Gas Processing Plant. Antero has 220,000 net acres in the heart of the Marcellus, with about 75% of the acreage expected to have rich gas potential.
• Range Resources has signed a second ethane agreement related to its Marcellus shale operations. A subsidiary of the Texas oil and natural gas producer will ship up to 20,000 barrels of ethane per day on Enterprise Products Partners' Appalachia-to-Texas ethane pipeline (ATEX Express). Range's 20,000-barrels-per-day commitment gives the company anchor shipper status on the pipeline. The ethane will be delivered to Mont Belvieu (Texas) customers along the Gulf Coast as well as to various customers at other ATEX delivery points. The ATEX Express, which will originate in southwest Pennsylvania, is expected to commence operations in the first quarter of 2014.
• ON Geophysical has acquired 235 square miles of new 3D multi-client seismic data in the Marcellus shale play in central Pennsylvania. The Marcellus contains about 84 trillion cubic feet of undiscovered, technically recoverable natural gas and 3.4 billion barrels of undiscovered, technically recoverable natural gas liquids according to an August 2011 assessment by the US Geological Survey, making it one of most prospective unconventional gas plays in North America.
• BENTEK Energy, a Colorado-based research and consulting firm, says that Marcellus shale natural gas pipeline takeaway capacity will more than double in the next two years, jumping to 8.5 bcf/d by 2013. About 5.0 bcf/d of new Northeast expansion capacity is currently in the planning phase and scheduled to be operational during that time frame. These projects will help natural gas producers in the Marcellus grow production volumes and reach premium Northeast markets during peak winter demand. Access to local supply also is expected to mitigate supply disruptions from hurricanes in the Gulf and cold weather impacts in Texas, the Southeast Gulf, the Midcontinent, and the Rocky Mountain regions, all of which supply the Northeast. Despite these expansions and supply growth, BENTEK expects New York citygate prices to continue trading at a premium to other Northeast hubs through this winter. Of the total incremental capacity, only 1.0 bcf/d will reach New York City by 2013, which is not expected to be enough to completely alleviate capacity constraints to the citygate market. Additional supply to the Premium Northeast market is expected to put downward pressure on regional prices.