Even with the big retreat by operators in U.S. onshore natural gas plays, domestic output will continue to grow “for the foreseeable future,” according to Raymond James & Associates Inc. energy team.

J. Marshall Adkins and John Freeman said in a note last week they have updated their bottoms-up analysis of U.S. natural gas supplies in part because of efficiency measures, and in part because of associated gas from oil wells.

“Over the past five years, forecasters have consistently underestimated how much more efficient operators become in these ‘gas manufacturing’ plays over time,” wrote the duo. “The industry is constantly learning how to do more with less. They continue to fine tune their completion techniques, which are resulting in higher initial production rates and estimated ultimate recoveries.”

Raymond James now is forecasting 2013 average production of 66.8 Bcf/d, up 1.3 Bcf/d from a previous forecast. In 2014 average gas output now is set at 67.4 Bcf/d, up 0.6 Bcf/d.

“This time last year our U.S. oil and gas production model was telling us that surging U.S. gas supply was probably going to force natural gas prices lower through 2012,” said Atkins and his colleague. “In hindsight, this surging gas supply coupled with a ‘nonwinter’ helped send pre-winter natural gas prices from over $4.00 to a low of $1.91/Mcf by mid-April.

“Now that the dry gas rig count has dropped precipitously (down 60% year/year), many energy analysts are eagerly anticipating an imminent roll-over in U.S gas supply. We guess gas supply didn’t get the memo because it continues to climb steadily higher.” Raymond James production model now indicates that domestic supplies won’t roll over “anytime soon and could even continue growing through the rest of this decade (especially if oil prices stay anywhere near current prices).”

The “surprising, nonconsensus” outlook mostly is driven on three factors: Marcellus supply growth has been “unprecedented and is even proving to be more impressive” than the Haynesville Shale growth from 2007-2011; massive infrastructure build-out will help move gas volumes over the next few years; and high crude prices still are driving high levels of liquids drilling, which in turn is creating a lot of associated gas.

“As operators shift to development drilling in places like the Marcellus Shale and certain oil and liquids plays, we should continue to see higher production rates and more and more volumes being extracted for less on a per-unit basis,” said the analysts. According to data, Haynesville gas output grew from 0.5 Bcf/d in 2007 to almost 8.0 Bcf/d in 2011. In the Marcellus, production was 0.4 Bcf/d in 2009 and is almost 7 Bcf/d today.

“Obviously, the recent slowdown in the growth rate is primarily attributable to a more aggressive shift away from dry gas drilling (i.e., Haynesville, Fayetteville) to liquids-oriented plays,” said the analysts. “For example, there were roughly 886 and 792 horizontal wells drilled in the Haynesville in 2010 and 2011, versus only 264 in 2012. That said, the more shocking revelation is that U.S. gas supply is still growing despite the collapse in gas drilling.”

This year Marcellus production is forecast to jump 2.0 Bcf/d year/year, “more than offsetting the 0.7 Bcf/d of production declines from the Barnett, Fayetteville and Haynesville combined.” In the Marcellus, 53 gas rigs were dropped between November 2011 and November 2012, but “gas production is still up an estimated 3.1 Bcf/d this gas year.”

Low prices and high decline rates were projected to force U.S. gas supplies lower, but the Marcellus “is the most economical dry gas play and much of it actually works at $3.00 gas prices. The fact of the matter is that operators are still drilling these high rate wells that generate great returns as E&P companies shift to pad drilling.”

Because of the sharp drilling reduction in dry gas activity, “the first- and second-year production declines, which are typically the largest, are now behind us,” the analysts noted. “That means that if fewer and fewer dry gas wells are drilled each year, then the decline in production from those plays will become smaller and smaller (notwithstanding prior completion delays).”

If the output continues to decline on the lack of drilling, it would “make it easier for Marcellus growth and associated gas supply to more than offset those production declines from the dry gas plays,” they wrote. “Over the next two years, we may see a dramatic shift in natural gas flows and markets due to the ever-growing Marcellus. Massive infrastructure investment has been put in place and it wouldn’t be surprising to see production top our 10.4 Bcf/d forecast by year-end 2014.”

As the Marcellus oil and gas rig count dropped during 2012, natural gas prices in the region ticked higher, according to data compiled by NGI’s Shale Daily. After starting 2012 at $2.91/MMBtu and $2.59/MMBtu, NGI’s Marcellus SW PA/WV price index and Marcellus NE PA price index climbed to finish the year at $3.39/MMBtu and $3.31/MMBtu, respectively. During the same one-year time frame the rig count for the Marcellus Shale dropped from 172 rigs drilling for oil and gas to 113 rigs, according to NGI’s Shale Daily Unconventional Rig Count.

Recent production rates are “staggering,” with Cabot Oil & Gas Corp. reporting two Marcellus wells in 3Q2012 with a combined 20-day production rate of 32 MMcf/d, according to Adkins and his colleague. “These numbers could even be higher if infrastructure constraints were not choking back production.”

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