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Marcellus Gas Already Displacing Traditional Supplies, Says Analyst

Marcellus Shale gas already is displacing pipeline flows from the west, an energy analyst said Tuesday at the Argus Marcellus Shale Gas Summit 2010 in Houston.

Based on gas pipeline flow data compiled by Bentek Energy LLC, Marcellus production is booming, with more than 1 Bcf/d already in the pipe from the northern part of Pennsylvania and about 0.45 Bcf/d flowing to pipelines in the southern half, which includes wells in Pennsylvania and West Virginia.

The northeastern portion of the play alone has grown from 0.5-0.7 Bcf/d in 2009 to more than 1 Bcf/d in a year and a half, said Bentek's Tom Sherman, who manages the firm's production group.

"There's been a lot of talk about displacement," Sherman said. "As this Marcellus production grows, something has to happen to that gas." Using Bentek's pipeline flow data, "basically what we are seeing is that displacement is already under way."

The booming shale production is boosting overall production figures. Based on pipeline flow data, total U.S. gas production in 2010 will "probably be around 3% over 2009 levels," Sherman said.

Bentek's analysis indicates that Midcontinent inbound pipeline gas flows are down 28% this year from 2009. Meanwhile, the Northeast has seen inbound gas flows jump in the same period by about 32%. As the Marcellus output grows, "eastern shale plays will force gas west," said Sherman. "The supply dynamic is already changing..."

By reviewing the rig release numbers across the Pennsylvania portion of the Marcellus Shale, Bentek determined that about 180 horizontal wells are being drilled every month in the state's portion of the play.

The massive amounts of gas being gathered in the Marcellus Shale are leading to a lot of expansion projects. "If you look to 2014 or so, currently there are about 5 Bcf of expansion projects planned in that [Marcellus] area," Sherman said.

The good news is that there will be more avenues for gas transport. However, the pipeline expansions "will threaten the Northeast premiums," said the Bentek executive.

Earlier this year Bentek predicted that growing Marcellus production would disrupt regional gas flow patterns and force Northeast gas prices downward (see Daily GPI, March 23).

What's driving some producers to continue to drill wells in particular shale plays is tied partly to the actual costs to drill. Bentek devised a national model to determine the breakeven costs to drill individual wells that produce either dry or wet gas.

The "major shale plays," Sherman said, "are the ones that are sub-$4 breakeven...Move up into Marcellus, and it has one of better breakeven prices with dry gas at $3.14/Mcf and wet gas at $2.86/Mcf...That's the second lowest after the Granite Wash [$2.67/Mcf], which is a wet gas play."

The Eagle Ford Shale's breakeven cost for dry gas is $3.67/Mcf; the wet gas cost is $2.96, according to Bentek. In the Haynesville Shale the dry gas breakeven cost is $3.50/Mcf; in the Fayetteville Shale it's $3.75.

Meanwhile, in the San Juan Basin, the breakeven cost to produce gas was found to be $5.13/Mcf; in the Piceance Basin it costs $4.54/Mcf. "That's what's driving this activity in the shale plays," said Sherman. "There are good economics, even at sub-$4 gas."

Bentek also projected the Marcellus Shale's future production using current activity and estimated ultimate recovery numbers, among other things. "Pennsylvania is the big winner in all of this," said Sherman. "From this point on, we see production growing from 3 Bcf/d to just over 7 Bcf by 2015..."

Producers, he said, "know it's a deal" in the Marcellus. "In 2007 there were only about 100 permit requests in Pennsylvania, all for vertical wells. A year later vertical and horizontal wells together totaled about 500 permits. Year to date there have been 2,353 permits in Pennsylvania...all but fewer than 250 for horizontal wells."

Appalachian gas flows already have doubled from a year ago but gas flows, after slumping to May 2009, have risen this year across all of the shale plays, Sherman noted. "Current levels are at all-time highs for pipeline flows," he said of the Lower 48 state's marketed production. We're seeing 62 MMcf/d, 62.5 MMcf/d."

In some regions of the country Bentek found gas production in decline, led by the Midcontinent, the Rockies and in California. However, the loss of gas output in those areas has been more than overcome by shale gas, especially from the Marcellus and Haynesville plays, said Sherman.

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