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Appalachian 'Biggest, Baddest Basin' For Gas Production, Analysts Say

The Appalachian Basin is the "biggest, baddest basin there is" in terms of natural gas production, and the Marcellus Shale will be an abundant source of gas for years, even with higher transportation costs, according to analysts with U.S. Capital Advisors LLC (USCA).

According to a five-page summary released Tuesday, USCA analysts said the Appalachian Basin accounts to about 19% of total gas production in the United States, producing about 14.5 Bcf/d. If overall U.S. gas production were to grow by about 2% a year, the analysts project the basin would account for 31% of the nation's total output by 2020.

USCA said the Northeast was now a net exporter of gas, a fact that was driving the reversal of every major pipeline to the region (see related story).

"Local Northeast gas production now exceeds average annual demand," the analysts said. "By 2015, we look for regional production to exceed average demand for all but three peaking months of the year.

"To move gas out of the Northeast, pipelines have on the drawing board or underway almost 15 Bcf/d of new projects. On top of that, the industry is working on more than 9 Bcf/d of new projects to either alleviate regional bottlenecks or find ways to get this gas to incremental markets."

The analysts said pipeline companies in the basin are "in the driver's seat for the first time in almost a decade. Not only are they filling up capacity on under-utilized long-haul pipelines via backhaul and reversal projects, but also for a while, some of the pipes will earn for both north and southbound flows."

USCA predicted that basis would remain under pressure until 2017, due to a glut of gas in the basin. The analysts said several projects totaling 5.2 Bcf/d of transport capacity are scheduled to come online by early 2016 and should alleviate some of the basis pressure, but they warn it will take some time to bring the projects online.

Meanwhile, costs to exit the Northeast are increasing. "A year ago, backhaul rates to the Gulf Coast were about 40 cents/Mcf with eight-year terms," the analysts said. "New rates to the Gulf Coast are now going for about 60-70 cents/Mcf with [more than] 15-year terms. We are even hearing about some contracts signed for 60-year terms."

Natural gas liquid (NGL) supply was forecast to grow more rapidly than gas production in the Appalachian Basin due to the production of ethane driven by blending limitations, the completion of de-ethanizers and the Appalachia-to-Texas Express (Atex) pipeline (see Shale DailyDec. 5, 2013), and incremental wet gas drilling.

"We see NGL supply growing at a 32.3% compound annual growth rate, versus 8.9% for gas," the analysts said.

The basin was also described by USCA as "bucking up against limitations" for ethane and propane.

"We have reached pipeline spec limitations on blending ethane, and just in time, de-ethanizers have come online and the Atex ethane line was completed," the analysts said, referring to the Appalachia-to-Texas pipeline project. "We think there will be excess de-ethanization capacity until mid-2016."

USCA said that after mid-2016, additional capacity would be needed to supply two proposed projects, assuming Atex is expanded. Otherwise, a new y-grade pipeline would be needed to ship ethane south to the Gulf Coast. The projects are Sunoco Logistics Partners LP's Mariner East 2 and the Utica To Ontario Pipeline Access project, a joint venture (JV) between Kinder Morgan Energy Partners LP's (KMP) Kinder Morgan Cochin LLC and Nova Chemicals Corp. (see Shale DailyDec. 16, 2013Dec. 5, 2013).

On propane, the analysts said "it is no coincidence that the amount of C3 frac [fractionation] capacity that has been announced almost exactly equals the amount of local demand plus expected exports. For now, there is still enough local demand to soak up all the local production. By 2Q2015, however, local propane production will exceed both average local demand and C3 frac capacity."

USCA said there is a need for a y-grade pipeline in the Appalachian Basin, but didn't endorse either of two competing projects. They also said the region needs additional processing capacity.

The Bluegrass Pipeline, a JV between Williams Pipeline Partners LP and Boardwalk Pipeline Partners LP, has been shelved for now (see Shale Daily, April 28). It would carry mixed NGLs to the Gulf Coast and Northeast markets. A JV between KMP and MarkWest Utica EMG LLC also has proposed a pipeline to deliver NGLs from Appalachia to Mont Belvieu, TX. Both projects held open seasons late last year (see Shale DailyNov. 11, 2013Aug. 9, 2013March 7, 2013).

"While we don't have a strong opinion on which of the two major proposed y-grade pipelines will get built, we do see a need for a raw NGL pipeline by mid-2016," the analysts said, adding that "with the rapid ramp-up in wet gas production in West Virginia, southwest Pennsylvania and the Utica, the region is going to need additional processing capacity post-2015.

"Following completion of the 7.9 Bcf/d of planned [processing] plants by mid-2016, we see the need for [approximately] another 3.2 Bcf/d of processing capacity by 2020."

USCA's analysts also identified several underlying trends in the Marcellus, and chief among them were transportation costs.

"We estimate wider basis/higher transportation costs have increased Marcellus break-evens by 30-50 cents/Mcf over the past year," the analysts said. "That said, we still see [more than] about 6,500 remaining locations in Pennsylvania alone, representing about 70 Tcf of gross resource that can break even at $3.00 gas or below and would generate 50% internal rate of return or higher at the current strip.

"Moving the economic threshold up to $4.00 gas increases remaining economic inventory to about 10,000 wells, representing [more than] 90 Tcf of resource. So the bottom line is, even with higher costs, the Marcellus will still be the driving force of U.S. gas supply for many years to come."

Based upon its type curves, the top counties in terms of estimated ultimate recovery (EUR) for wells in 2013 was a tie between Pennsylvania's Susquehanna and Wyoming counties, which each totaled 9.9 Bcf per well. Greene County, PA, was third (9.9 Bcf), followed by a tie between Pennsylvania's Allegheny and Sullivan counties (7.1 Bcf).

"On a percentage basis, we saw the greatest year-over-year [y/y] improvement in per well productivity from Greene County, with average EUR increasing 24% y/y in 2013," the analysts said. Pennsylvania’s “Allegheny, Tioga and Washington [counties] also saw material improvement in per well EUR at 18%, 13% and 13%, respectively."

USCA crowned Cabot Oil and Gas Corp. the Marcellus' "heavyweight champion," and dubbed Rice Energy Inc. as the play's "heavyweight contender."

"[Cabot] hands down [has] the best lateral normalized productivity in the play, with average EURs of nearly 16 Bcf in 2013. [There is] no denying southern Susquehanna County can go toe-to-toe with any gas resource play in North America," the analysts said (see Shale DailyFeb. 20). They added that Rice, which went public in January (see Shale DailyJan. 13), was "already making a splash, nipping on Cabot's heels for the heavyweight title. Average EUR came in at about 12.5 Bcf in 2013, second-best in the trend as the company held on to prior year's already robust productivity performance."

The analysts said "gym time" was "paying off" for EQT Corp. (see Shale DailyApril 25). "Average EURs jumped about 23% y/y to 10.8 Bcf, the biggest gain of any operator by our calculation," they said, adding that the company is "reaping the rewards of reduced cluster spacing completions, as well as high-grading of activity toward [its] core Greene County position."

USCA said National Fuel Gas Co. (NFG) was its "underdog surprise" in the Marcellus, while CNX Gas Corp. is the operator holding the "biggest room for improvement."

NFG is “not generally thrown around in the upper echelon of well productivity, but 2013 performance surprised us with about 9.0 Bcf average EUR, ranking in the fourth spot of public operators," the analysts said, adding that NFG was "crushing it in Lycoming County, PA, with a strong constituency of [more than] 15 Bcf EURs."

At CNX, "overall average EUR [was] sub-par, but showing potential for greatness with several wells pushing 10 Bcf EURs. Core acreage in Washington and Greene counties [was] surrounded by monster wells, so [the shale] rock looks capable of delivering as execution improves."

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