The exceptionally harsh winter has pushed natural gas inventories to a multiyear low and raised the 30-day moving average of Henry Hub spot natural gas prices near the $6 per million British thermal unit threshold during the first week of March. Meanwhile, the cold weather and exceptionally large corn crop impacted propane prices across the Midwest and Northeast, causing Congress to deliberate about the necessity of a "strategic propane reserve" after prices skyrocketed in first-quarter 2014. The play that benefits the most from this weather anomaly is the Marcellus.
For Hart Energy Research & Consulting’s North American Shale Quarterly (NASQ), our analysts create a valuation map generated from the weighted combination of geologic base maps including structure, pressure, vitrinite reflectance and gas-in-place. Looking at the valuation map, two sweet spots in Pennsylvania emerge.
The map indicates the sweet spots.
In the southwestern part of the state, Washington and Greene counties are the focal point for the wet gas producers in the Marcellus. Recent data from the state indicate that there are more than 1,500 wells drilled in Greene and Washington counties. Moreover, these two counties have the highest percentage of permitted wells being drilled—an average of 60%. In first-quarter 2014, both counties are in the top four in regard to permitting. EQT, Chevron, Southwestern, Chief Oil & Gas and CNX Gas are allocating capex in Washington and Greene counties.
In the northeastern part of the state, the two counties with the highest valuation score are Bradford and Susquehanna. This part of the Marcellus produces dry gas from
shallow wells and has attracted most of the capex when the play was originally being developed in the late 2000s. Given its earlier development cadence, nearly 1,900 wells have been drilled in Bradford and Washington counties. Coupled with Tioga and Lycoming counties, the northeastern part of Pennsylvania has seen nearly 3,500 wells drilled. More importantly, the area continues to attract the lion’s share of capex and the highest level of permit activity, led by Chesapeake Energy Corp., (NYSE: CHK) Range Resources Corp. (NYSE: RRC) and Cabot Oil & Gas Corp. (NYSE: COG) Private operators, such as Rice Drilling and Energy Corp. of America, have also increased drilling in the northeast.
Across the state, operators have ramped up the pace of well completions and pipeline connections, thus reducing their backlog and increasing production. Given the heighted pace of completions and tie-ins, production in the Marcellus set a new high of more than 12 billion cubic feet equivalent per day (Bcfe/d) in 2013, allowing our 2014 forecast to be adjusted upwards 10% to 15.47 Bcfe/d from 14.04 Bcfe/d.
Production growth has been aided by increased pipeline takeaway capacity. The startup of the ATEX and Mariner West pipelines, which offer takeaway of purity ethane to the Gulf Coast or Ontario markets, respectively, have created a new outlet for Marcellus NGL. These include liquids produced by the newly interconnected network of de-ethanizers constructed and operated by MarkWest Energy Partners LP (NYSE: MWE).
These ethane pipelines will continue to see increasing volumes as Marcellus gas production, processing and de-ethanizer capacity expands. European chemical plant operators, which are lining up waterborne access to Marcellus NGL feedstock through the pending Mariner East terminal, will also see lower feedstock costs as infrastructure comes into service.
Dry gas and wet gas production from the Marcellus will have ample demand from domestic and international markets. While the Marcellus experienced a lull in industry activity in 2012, due to infrastructure constraints and natural gas prices hitting a commodity-cycle low in the last week of April, there appears to be nothing stopping the "Beast from the East" going forward.
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