Appalachian production for the exploration and production (E&P) arm of National Fuel Gas Co. escalated in the last quarter of 2010 at a triple-digit pace year/year, jumping 184% to 8.1 Bcfe, with most of the gains — 5.9 Bcfe — from the Marcellus Shale, executives said Friday.

E&P unit Seneca Resources Corp. reported combined production of gas and crude oil up by more than 4.1 Bcfe, or almost 36%, to 15.7 Bcfe from 1Q2010. Seneca’s production estimate for the entire 2011 fiscal year has been increased to a range of between 65 Bcfe and 75 Bcfe, versus a previous estimate of 60-70 Bcfe.

“Throughout the first quarter we continued to deliver excellent operational results,” National Fuel CEO David F. Smith said during a conference call. “Seneca brought 14 additional net Marcellus wells on production and exited the quarter with daily Marcellus production reaching 90 MMcf/d, which was up from only 8 MMcf/d at the same time last year.”

Seneca’s East Division operates close to 3,000 wells in western New York and northwestern Pennsylvania. It has about 730,000 acres of fee minerals, 260,000 acres of leased minerals and 100,000 acres of surface and timber rights throughout the region. Most of the development today is in the Marcellus Shale; some well testing also is under way in Utica Shale acreage.

The pace in the Marcellus continues to ramp up, “taking advantage of the favorable economics across our extensive acreage position,” said Smith. “At the same time, we are moving forward on our numerous Appalachian infrastructure projects and have reached a major milestone with the commencement of construction on the first phase of the Pipeline and Storage segment’s Line N Expansion project in southwestern Pennsylvania” (see Daily GPI, April 29, 2010).

“Though low commodity prices and anticipated short-term challenges in the Pipeline and Storage segment weighed on our financial results for the quarter, consistent earnings in the Utility and Energy Marketing segments continued to provide the earnings stability that we look for in our balanced business model,” said the CEO.

Seneca President Matthew D. Cabell said Marcellus output should reach the 100 MMcf/d mark by the end of March.

“We drilled four first Marcellus-operated well only 18 months ago and we’ve now completed 32 and added 90 MMcf/d of Marcellus production,” said Cabell. “We continue to learn, we’re refining our frack [fracture] design, and we’ve improved efficiencies.”

Unlike some of its peers, Seneca has had few infrastructure-related problems. Only one well currently is shut-in, and Seneca is building infrastructure to it now, he said. Two additional drilling rigs are scheduled to be added to the play later this year. However, he told analysts that drilling costs for the shale wells are rising.

“On the cost side, we’re drilling wells faster, more efficiently…with centralized water facilities,” Cabell said. “But the longer laterals more than offset the gains…A current [Marcellus] well costs $5 million to complete, assuming a 12-stage frack [fracture]…”

Considering the “current growth of production in the Marcellus” by a bevy of producers, “it’s challenging today. Service companies are reacting to it. We have seen an increase in the cost of pressure pumping crews, coil tubing units. But I don’t think it’s going to be a major constraint to growth in the play.”

For the past four years the company and partner EOG Resources Inc. have been testing the potential of Seneca’s Pennsylvania leasehold (see Daily GPI, Aug. 10, 2009). EOG sold Seneca some of the joint acreage in Tioga County, PA, last month (see Shale Daily, Jan. 11). Before buying the additional acreage, National Fuel last September said it was in the hunt to secure an additional joint venture (JV) partner to help develop the Marcellus portfolio (see Daily GPI, Sept. 23, 2010).

“We opened our data room in late November,” Smith said during the conference call. Today “a number” of signed confidentiality agreements have been completed with “multiple diverse potential partners.” At some point, perhaps within the next few months, National Fuel may make a deal. However, the operating word is “may,” said Smith.

“A three to six-month timeframe is where we expected to have an answer, if we move ahead with the JV…It is complex, the data room extensive…It’s important for us to get the best partner, the best deal, as opposed to meeting some self-imposed deadline…But we’re in a position where we’re not compelled to do a JV. We’re not capital-constrained…With or without a JV, we’ll continue to grow for years to come. We’ll do a JV only if it offers significant shareholder value.”

National Fuel earned $58.5 million (70 cents/share) in 1Q2011, versus $64.5 million (78 cents) in the year-ago period. The decline, said officials, “Higher pension expense in the Pipeline and Storage segment and lower natural gas prices in the Exploration and Production segment were the main drivers of the decreased earnings,” the company said.