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Marcellus, Utica Output on Pace to Increase 3.6 Bcf/d from 2012

Barclays Capital's energy analysts see the potential for natural gas production from the Marcellus and Utica shales to jump by 3.6 Bcf/d year/year (y/y) in 2013 and almost as much again by the end of 2014.

Analysts Biliana Pehlivanova and Shiyang Wang have been reviewing data from the Appalachian Basin for months. Earlier this year they projected that the Marcellus would match last year's rate of growth (see Shale DailyMarch 8).

But the pace has accelerated. Northeast production growth, they noted, "is outpacing expectations, with pipeline flow reports suggesting that Marcellus Shale output rose 2.1 Bcf/d from January through June, versus 1.5 Bcf/d gain in the first half of 2012 -- a 40% acceleration."

Combined, Marcellus and Utica shale gas output is on a blazing pace for this year and again in 2014, they said in a note on Tuesday.

"Next year, while we expect a slowdown of production growth in northeastern Marcellus, growth in the Utica should accelerate, and we expect production in the region to add 3.3 Bcf/d y/y in 2014."

Many of the market participants that the duo spoke with as they accumulated data said they expected slower increases because of the slow pace of "infrastructure additions and a moderation of drilling." However, they have concluded an analysis of upcoming infrastructure expansions and have updated Marcellus and Utica production projections. What they want to know is, "when will the Northeast become a net gas 'exporter,' and what does that mean for prices?"

Their conclusion is that while production may not cover winter peak demand in the Northeast region this winter, it will grow to cover the 2014/2015 peak making the Northeast a net exporter through most of the year by 2015.

Pipeline flows already are starting to reverse and are trading at negative differentials, Barclays said, advising they expect "discounts could deepen and become more widespread as the continued growth of production will struggle to be matched by a commensurate increase in regional demand in the next three to five years.

"Northeast gas will have to flow out of the region and we expect Northeast prices to be increasingly discounted, not only rlative to Henry Hub, but also to the Midcontinent and western markets."

Utica volumes, they noted, increasingly have been mixed with Marcellus numbers in production reports. The Barclays duo is tracking Marcellus production by aggregating gas flows at receipt points on the major interstate pipelines in Pennsylvania and West Virginia. However, the two plays overlap not only geographically but in some cases, Ohio gas flows into West Virginia processing facilities and is captured in flows that generally reflect Marcellus output. In other cases, Utica gas may flow into intrastate pipes without data flow information. Also, state production reports in Pennsylvania lump all unconventional production together.

Taking that into account, the Barclays analysts are estimating based on company guidance, that production in the Utica "is likely to grow from about 120 MMcf/d at the beginning of the year to 550 MMcf/d by the end, and to add about 250 MMcf/d on an annual average basis. Given upcoming processing capacity additions, we expect the Utica to grow by a further 500-600 MMcf/d in 2014 on an annual average basis, and reach 1.1-1.2 Bcf/d by the end of next year."

Northeast drilling could moderate more than it already has, they concluded. Baker Hughes Inc. data puts the number of rigs drilling in the Marcellus at about 107 on average for 2012, but the duo noted that only 78 rigs now are operating.However, "we expect robust growth to persist despite a lower rig count," as drilling efficiencies produce better than expected results.

As Barclays, other analysts and producers have said, new pipe infrastructure largely will debottleneck dry gas output. New capacity added last year could carry an additional 3.2 Bcf/d and additions starting this year are expected to total 2.7 Bcf/d with another 1.4 Bcf/d in 2014.

 Pehlivanova and Wang said the introduction of ethane takeaway from the area would enable wet gas output form the southwestern part of the Marcellus and the Utica to increase by 3.5 Bcf/d by the end of 2014.

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