New York appears more likely to lift the de facto natural gas drilling moratorium in parts of the state's Marcellus Shale, but for a variety of reasons -- not the least of which is hesitation by operators to commit capital -- determining how much of an impact the prospective acreage may have on U.S. gas markets leads to more questions than answers, according to research by Goldman Sachs & Co.
Earlier this month the New York Department of Environmental Conservation (DEC) published the preliminary draft permit rules for hydraulic fracturing (fracking) operations, which would impose additional rules on Marcellus operators (see Shale Daily, July 11). A public comment period is scheduled to begin in August, which may lead to additional restrictions, but eventually the DEC is expected to allow horizontal gas drilling using fracking techniques in certain areas.
The "geological characteristics" in some counties in southern New York are similar to those in northeastern Pennsylvania, where some of the biggest gas wells have been tapped, the Goldman team noted. New York operators produced 120 MMcf/d of gas in 2009, but that number could easily triple if the gas wells in southern New York counties prove as prolific as those in northern Pennsylvania. The total resource potential of the entire Marcellus Shale varies but the DEC uses 168-517 Tcf "as a reasonable range."
"If the DEC recommendations are implemented, and producers choose to drill to, at a minimum, hold acreage, and takeaway infrastructure capacity is available, production growth out of the New York section of the Marcellus would pose upside risk to our U.S. production forecast," said the Goldman team. "As a result, it would present downside risk to forward New York Mercantile Exchange natural gas prices, especially after 2012, by which time new production can meaningfully ramp up."
The highest dry gas well productivity in Pennsylvania is in Susquehanna, Bradford, Tioga and Lycoming counties. Based on "industry conversations," the acreage in Tioga, Bradford and Susquehanna counties "extends into Chemung, Delaware, Tioga and Broome counties in southern New York before the thickness of the shale formation narrows further to the north," said the analysts. Fracking may be prohibited in Delaware County, based on industry conversations, but "we expect drilling to occur, at least to hold leases" in the other three counties.
Talisman Energy Inc. and Chesapeake Energy Corp. are believed to be the largest leaseholders in those New York counties, with about 280,000 acres between them, according to Goldman estimates. Adding in acreage controlled by smaller producers, the analysts estimated that 30 rigs could drill 220 wells over two-and-a-half years to cover the minimum lease requirements for the entire area -- assuming the well productivity is similar to that of northeastern Pennsylvania.
But there are reasons why the actual output from New York's Marcellus Shale may not come close to the initial estimates:
"For these reasons we do not expect production to reach the 250 MMcf/d in year one and 825 MMcf/d in year two, which a full drilling program to hold leases would generate," said the Goldman team. The analysts' base case assumes a 40% discount, which would result in 200 MMcf/d of production the first year and 500 MMcf/d the following year.
"We currently forecast total Marcellus production to be 4.3 Bcf/d on average in 2012 (+1.6 Bcf/d growth year/year), so the impact on these numbers by extending the Marcellus northward could be important, in our view. Additional Marcellus production growth would accentuate the current structural oversupply in the U.S. natural gas market, making even more far-reaching adjustments necessary on the demand side to balance the market over the medium to long term."