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Marcellus Dry Gas Producers Slamming on the Brakes, Says Bentek

Drillers in northeastern Pennsylvania -- the dry gas area of the Marcellus Shale -- in the months ahead will stomp on the brakes with both feet and jam the dry gas freight train into reverse, according to an analysis by Bentek Energy LLC. Even if they do, a bulging gas surplus will fester behind pipeline capacity constraints for years to come, the firm said.

"...Northeast supply growth has outpaced capacity additions and local demand growth and led to a huge backlog of non-producing wells, exacerbating the potential for supply congestion and price weakness," Bentek said in a recent Market Alert. "In response, producers have announced a 14% decline in total northeastern Pennsylvania (dry gas) rig activity."

Cabot Oil & Gas Corp. is among the latest producers to say it is cutting back in the Marcellus (see related story). Meanwhile, Williams Partners has announced plans for additional Marcellus takeaway capacity (see related story), and El Paso Corp.'s Tennessee Gas Pipeline is considering adding yet another Marcellus pipeline project to its slate (see related story).

Drilling cuts are expected to be limited to northeastern Pennsylvania, which is where the play's dry gas comes from. "The southwestern Marcellus and Utica are expected to see increased drilling," Bentek said.

The firm said more drilling cuts are in the offing. A 25% decline in drilling would nearly double the announced cuts so far, and a 50% decline would work off the well inventory backlog -- by 2017 -- and would "alleviate some significant constraints," Bentek said. "This scenario was considered to be the most likely case for upcoming Marcellus and Utica development."

 

Supply-demand fundamentals in the Northeast make the current level of Marcellus drilling unsustainable this year, the analysis found. "Unless the well backlog can grow exponentially, there is inadequate pipeline capacity to keep pace with the current drilling and production growth. Moreover, even a 25% decline in rig counts still would leave the region capacity-constrained and eventually lead do a further buildup of the well backlog."

Continuing low prices, which have resulted in large part from an oversupply of natural gas, will prompt exploration and production (E&P) companies to cut dry gas capital expenditures (capex) by nearly 40% this year, Moody's Investors Service said Friday.

E&Ps this year are also expected to cut by half the number of new dry gas wells they drill compared with 2011 levels, according to Moody's Senior Vice President Terry Marshall. But the natural gas oversupply is likely to increase slightly from 2011 levels, he said.

The current oversupply -- the result of increasingly cost-effective production from shale deposits, mild winter weather and bloated storage levels (inventories stand at 2,761 Bcf, 817 Bcf higher than last year at this time and 765 Bcf above the five-year average, according to the Energy Information Administration) is keeping gas prices low and leaves some speculative-grade E&Ps particularly vulnerable, Moody's said.

Increasingly, E&Ps are finding it more economical to produce oil and natural gas liquids (NGL). "Some E&Ps will generate more than half of their revenue and cash flow from oil and NGLs in 2012, even while dedicating only 20% of their total production to oil and NGLs," Moody's said.

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