Although drilling activity in the Marcellus Shale has slowed and some producers have dropped rigs, there is enough of a drilling backlog that, if wells were brought online over a one-year period, production would continue to grow but at a slower pace, energy analysts with Barclays Capital said.
According to Biliana Pehlivanova and Shiyang Wang, while production in the Marcellus has decoupled from gas-directed drilling trends, producers in the play are getting more efficient through pad drilling, tighter well spacing and drilling longer laterals with more hydraulic fracturing (fracking) stages. That, in turn, has created a backlog of 1,432 unconventional wells during the second half of 2012, according to data from the Pennsylvania Department of Environmental Protection (DEP), which classified the wells as either "temporarily shut-in" or "spud, drilling not completed." The DEP reported a backlog of 1,445 wells with those two classifications in 1H2012.
The DEP Office of Oil and Gas Management recently reported that natural gas production from unconventional sources -- including the Marcellus and Utica shales and other formations -- hit a record 2.04 Tcf in 2012 (see Shale Daily, March 6). The agency broke out separate reports for Marcellus-only production from July 2009 to December 2011, but Act 13, the state's omnibus Marcellus Shale law, required the DEP to report all unconventional production, which is not broken down by shale/tight gas and oil plays.
"While the two breakdowns should overlap to a large extent, some discrepancies are possible," the analysts said, adding that the DEP data appears "incomplete for the most recent reporting period [2H2012], and leaves a large number of wells with an unclear status even further back in history. However, detailed analysis of the discrepancies suggests to us that the data on producing wells and wells reported as 'spud, drilling not completed' and 'temporarily shut-in' are largely consistent, and that the drilling backlog is, if anything, underestimated."
Pehlivanova and Wang said average production grew 2.7 Bcf/d compared to 2011, after 1,319 unconventional wells were brought into production in Pennsylvania in 2012.
"With the current backlog estimated at 1,432 wells, we believe the area could repeat and exceed this production performance this year, even if no new wells are drilled," the analysts said. They said that under a scenario where 65% of the backlogged wells targeted dry gas areas, and the remaining 35% targeted wet gas, bringing 1,428 wells online over a one year period would bring average production growth of nearly 3.0 Bcf/d year-over-year (y/y) in the first year, peaking at 4.6 Bcf/d by the twelfth month.
"Just how quickly could the industry work off the backlog of wells will depend, in large part, on the expansion of pipeline and processing infrastructure," the analysts said. "Pipeline capacity in the Marcellus grew by 2.8 Bcf/d in 2012, unlocking some of the latent supply. This year, we expect a comparable amount of additions, with about 1 Bcf/d under construction, 1 Bcf/d approved or proposed, and another 800 MMcf/d in planning stages. The majority of the pipeline expansions are concentrated in the Northeast of the Marcellus, which coincides with the location of the majority of backlog wells."
The analysts said processing capacity added 630 MMcf/d in 2012, and a further 1.9 Bcf/d is in the works for this year. These processing capacity additions are concentrated in Southwest Marcellus debottlenecking mostly wet wells in the region.
"To be sure, we do not expect drilling in the Marcellus to halt," the analysts said. "While some producers have announced scaling back of capital spending in the region, others are accelerating drilling and projecting increasing production gains. Activity in dry gas counties is more strongly affected by natural gas prices, while drilling in wet gas areas has remained relatively steady despite the price pull back. In fact, gas-directed drilling in dry gas counties has correlated with the rolling 12-month forward natural gas price strip lagged by six months. Dry gas rigs in the Marcellus have already recovered marginally from last year's levels as gas prices regained ground from decade lows."
It's unlikely the drilling backlog would be completely worked off in 2013 and would more than likely extend into 2014, the analysts said, because of simultaneous developing production. They pointed out that while an average of 83 rigs targeted Pennsylvania's portion of the Marcellus in 2012 -- compared to 100 rigs in 2011 -- the drilling backlog increased by 390 wells between 2H2011 and 2H2012.
"Even with a moderation of drilling from current levels, we believe Marcellus could repeat its 2012 production growth this year," the analysts said. "This would bring Marcellus production to an average 10.6 Bcf/d in 2013."
There were 102 rigs operating in the entire Marcellus Shale during the week ending March 1, down from 105 a week earlier and 153 a year ago, according to NGI's Shale Daily Unconventional Rig Count. Even with those declines, the Marcellus remains one of the most active shale plays in the country, with a greater number of rigs operating in only the Eagle Ford (222) and Bakken/Sanish/Three Forks (205).