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Marcellus Growth Finally Leveling Off Amid Steep Drop in Rig Count, Says EIA

Total monthly natural gas production from the Marcellus Shale is projected to decline slightly year/year in December and January for the first time since the play emerged as a major gas producing region, according to data from the Energy Information Administration’s (EIA) latest Drilling Productivity Report (DPR).

The EIA projects total Marcellus production to hit 15.7 Bcf/d in December, down slightly from 15.8 Bcf/d in the year-ago period. Production for January is expected to be 15.4 Bcf/d, compared with 15.9 Bcf/d in January 2015.

EIA senior analyst Jozef Lieskovsky said the projections are based on a combination of the November rig counts, historical data and anticipated declines from producing wells. Variables such as drilled but uncompleted (DUC) wells and new pipeline capacity coming online could materially change the actual production figures in the coming months, he said.

“It’s not a perfect association,” Lieskovsky said.

Still, the projections suggest that the pricing downturn, compounded by a takeaway shortage and large Appalachian basis differentials, may finally start to take its toll on Marcellus production, which continued to climb through the first half of 2015 despite cutbacks from exploration and production (E&P) companies in response to challenging market conditions.

After peaking at just under 16.2 Bcf/d in June, Marcellus production has declined gradually month/month, down to 15.9 Bcf/d in November, according to the drilling productivity data. The projected December/January production totals would continue the first real period of sustained contraction in a play that has grown rapidly since 2007, when it was producing slightly more than 1 Bcf/d.

“We show that the production will decline” because “the observed productivity per rig and the number of rigs is just not enough to offset the declines of all the producing wells,” Lieskovsky said. While per-rig productivity has risen substantially in the region, “it’s a pretty steep decline in the rig count.”

According to the most recent Baker Hughes Inc. rig count, the Marcellus held steady at 42 rigs as of last Friday, a 49% year/year decline (see Shale Daily, Dec. 4). The last time the Marcellus rig count was that low was in March 2008, according to historical data from EIA.

Penn State University geosciences professor Terry Engelder, considered an expert on the Marcellus, told NGI’s Shale Daily that 2015’s production curve can be traced back to a flurry of E&P activity in 2012, when the rig count peaked at just above 140.

“The price of natural gas in August of 2008 climbed up well above $10/Mcf, so people in 2008 were making decisions based on that expectation, and then they were leasing based on that expectation,” Engelder said, noting that by 2012, E&Ps were drilling to hold by production all the five-year leases they had negotiated in 2008.

“The outcome of what we see in terms of production, that was in the works since 2012, when the rig count went down so dramatically,” Engelder said. “By that point, the real rush to drill and hold was pretty well satisfied.”

Between January 2012 and January 2013, the Marcellus rig count fell from 141 to 96, according to EIA.

Since 2012, better-than-expected drilling efficiency and well productivity have driven production growth in the Marcellus, Engelder said. Now the play faces limited demand, a lack of infrastructure and competition from the highly productive wells coming online in the Utica Shale, he said.

Engelder noted that the Utica’s growth in 2015, climbing from 2 Bcf/d in January to just above 3 Bcf/d in November, corresponds roughly to the leveling-off in the Marcellus over the last few months.

“If you start to take into account the Utica as well as the Marcellus, things are still ramping up in the Appalachian Basin,” Engelder said. “When you have a bottleneck for infrastructure delivering to market, then you have to put these two plays together, and for every well that Range Resources manages to drill in the Utica that starts out with an [initial production rate] above 50 MMcf/d, that blocks two or three other Marcellus wells from being drilled and put online.”

There’s still plenty in the ground in the Marcellus, Engelder said, so when it comes to production, “the choke point right now is demand.”

“There’s a downward pressure right now on the Marcellus,” he said. “Whether or not you call it a manifestation of a maturing play is largely a subjective judgment based on whether you want to think about pressure points or look at what has changed in the process of getting to where we are right now.”

There are some bullish signs for the Marcellus heading into next year. In its most recent Short-Term Energy Outlook, EIA said it still expects the play’s DUC backlog, combined with greater drilling efficiency, to help drive growth in domestic gas production in 2016 as new pipelines connecting Appalachia to Northeast markets come online (see Shale Daily, Dec. 8).

“Historically, pipeline expansion has been the best indicator for Marcellus production,” Lieskovsky said, alluding to the potential for new takeaway capacity to increase production during the December/January forecast period despite the decline in rig activity. “From my experience, I know never to say never, but it is pretty challenging to make those wells economic at these prices.

“This is a price-driven decline” and not a signal “that the Marcellus is peaking,” he said. “If the price were to rebound, I think you would see quickly the rig count would go up and the completions would pick up shortly after.”

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