It has been conventional wisdom that with gas rig counts beginning a slow decline recently, production is still rising overall because it is mostly rigs being deactivated in conventional plays rather than those involved in the more prolific shale gas search. However, some market watchers are not buying that argument.
Teri Viswanath, director of commodities research for Credit Suisse, said she thinks the year-end finalizing of drilling budgets for next year by producers will show more drilling cutbacks, and that more shale gas rigs than before will join those in conventional plays in being idled.
The Marcellus Shale's transport advantage from being so close to the huge Northeastern market makes it an even more compelling play than it otherwise would be, Viswanath said. Do shales that are relatively remote from major market areas, such as Eagle Ford in South Texas and British Columbia's (BC) Horn River and Montney basins, suffer by comparison from greater transport costs? That's not such a problem for Eagle Ford, she said, because it's close to multiple major interstate pipeline connections and lots of midstream infrastructure, but the BC plays do have some disadvantage due to relative limitations on takeaway and processing capacity.
A Northeast utility buyer said he found a definite cost advantage during bidweek in baseload gas for October from delivered Marcellus Shale supplies. They were less expensive than Gulf Coast production because the Marcellus gas was so much closer to his citygate, he said, but comparative prices have become more "iffy" in the aftermarket. He thinks the Marcellus suppliers are trying to find their "comfort level" on how much they can charge and still remain competitive with Gulf Coast gas.
NGI's Shale Daily for Oct. 8 reflected some of the dynamics of transportation distances for shale economics. The average Marcellus price in northeast Pennsylvania was $3.75, which was 6 cents higher than southwest Pennsylvania/West Virginia numbers. They were considerably above Haynesville-North Louisiana's $3.56, which in turn slightly led Haynesville-East Texas, Barnett and Eagle Ford averages of $3.52, $3.53 and $3.54, respectively. Only Fayetteville's $3.53 in the Midcontinent rivaled the Gulf Coast quotes; three other Midcontinent shale plays ranged from $3.33 to $3.40.
A potential factor in the possibility of more shale rigs being idled next year: One of the most notable developments in shale market economics this past summer has been a tendency of producers to shift more capital and effort away from the drier gas plays such as Haynesville in North Louisiana and East Texas to "wetter" areas -- that is, richer in oil and natural gas liquid deposits. A prime example is the Eagle Ford Shale in South Texas, where activity is ramping up rapidly (see Shale Daily, Oct. 7).
The primary driver of the shift is dry gas prices that have been lingering around $4 or less since last spring and show no signs of strengthening anytime soon.