The Marcellus Shale is not only the most economic natural gas basin in the country, it is producing better returns than many oil plays, an energy industry analyst told an audience in Philadelphia last week.

"There's something about the rocks in the northeast Marcellus and the southwest Marcellus," Jonathan Wolff, senior managing director at ISI Group, Inc. said at the two-day Shale Gas Insight 2011 conference hosted by the Marcellus Shale Coalition. "It's just giving up a lot of gas. The well lives are long. The production profiles are relatively stable for the initial years. And you're getting very high returns, even 50% at today's prices."

If it's true that Marcellus producers aren't suffering in the current price environment, they are the exception, Wolff said. Because producers in most other basins aren't earning high enough returns at prices below $4/Mcf, and because the Marcellus currently accounts for only around 5% of the total supply picture, not enough to be a driver, Wolff expects prices to increase to $5-6/Mcf as the shale reinvestment cycle stabilizes. That stabilization will come from a move toward the cheapest plays, Wolff said.

Shales are obviously changing the natural gas supply and reserve outlook in the United States, but they are also changing the investment climate, Wolff said. When companies relied heavily on exploration, many investors shied away from an inherently unpredictable industry, but because shale wells always find gas and producers can model growth, investors are suddenly interested. "The real issue is capital," Wolff said.

Producers are currently spending 150% of their cash flow, according to ISI Group. "We believe this is a somewhat unsustainable situation," Wolff said.

He expects reinvestment rates to fall up to 120% as investors leave areas that aren't competitive at current prices, which will cause the rampant supply growth of recent years to mellow.

For instance, the Haynesville Shale along the Texas-Louisiana border "really killed the gas market," Wolff said. Production jumped from zero to 6 Bcf/d in a matter of a few years as companies drilled wells to hold acreage.

Wolff expects Haynesville production to flatten and even decline slightly in the near future while the Marcellus quadruples to 10 Bcf/d by the end of the decade, from 2.5 Bcf/d today. "As [shale plays] move to become a bigger part of the market, they will start to lower the overall cost picture for U.S. gas," Wolff said.

Louisiana enjoyed quite a surge in natural gas production after Chesapeake Energy announced the Haynesville discovery in March 2008. According to the Louisiana Department of Natural Resources, natural gas production in the state surged from 115.4 Bcf in March 2008 to 240.5 Bcf in May 2011. However, that number slipped to 226 Bcf in June 2011.