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 recently.

“There’s something about the rocks in the northeast Marcellus and the southwest Marcellus,” Jonathan Wolff, senior managing director at ISI Group, Inc. said earlier this month at the 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.”

But because producers in most other basins aren’t earning high enough returns at prices below $4/Mcf, and because the Marcellus, at around 5% of the total supply picture, isn’t driving prices, Wolff expects prices to increase to $5-6/Mcf as the reinvestment cycle for shale begins to stabilizes in the near future.

Shales are obviously changing the domestic supply and reserve outlook, 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 now interested. “The real issue is capital,” Wolff said. According to ISI Group, operators are spending 150% of their cash flow, something Wolff described as “a somewhat unsustainable situation.”

He expects reinvestment rates to fall by as much as 120% in the near term, as investors leave areas that aren’t competitive at current prices. That, in turn, would 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 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.

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