Wood Mackenzie: Marcellus to hold over $90 billion in value

Borehole drilling oil well
Source: DollarPhotoClub

The Marcellus, the largest shale gas play in the world based on current production, is projected to hold over US$90 billion in remaining value according to Wood Mackenzie’s latest key play analysis and output from its new well analysis tool. Combined, the top twenty operators in the play will generate nearly US$86 billion in value.

“These operators are forecast to spend nearly US$110 billion in the play and to drill over 25,000 Marcellus wells through 2035,” says Jonathan Garrett, Senior Analyst on Wood Mackenzie’s Lower 48 Upstream Research team.

Although rig counts have fallen since early 2012, improved efficiency and a focus on the play’s core sub-plays have led to continued growth. As such, Garrett notes that Wood Mackenzie has raised its forecast of 2020 production from 14 bcfed to 20 bcfed (billion cubic feet equivalent per day), accounting for nearly 25% of total US gas supply.

So far, according to data released earlier this month, about 5,400 Marcellus shale wells produced nearly 2 trillion cubic feet of gas during the first six months of the year. This is a 14 percent increase in production over the past six months of 2013, the data from the state Department of Environmental Protection show.

These impressive results have been obtained despite drilling a smaller number of wells than in the previous six months’ period (less than 500, compared to 675).

“We’re seeing the results of technical developments that allow much greater efficiency,” said Kent Moors, executive chair of the global energy symposium at the World Affairs Council of Pittsburgh.

Over ten years of shale exploration has allowed the companies to fine-tune their techniques to squeeze more out of each well, utilizing longer horizontal sections that reach more gas and take less time to connect to pipelines.

“Our efficiencies are wonderful. The laterals are longer. We’re drilling wells in shorter time-frames,” said David J. Spigelmyer, president of the Marcellus Shale Coalition, a North Fayette-based lobbyist.

He predicted the year-end gas total would eclipse 4 trillion cubic feet, which would account for 20 percent of the gas produced in the United States.

Wood Mackenzie’s granular analysis of the sixteen sub-play areas of the Marcellus have led them to formulate the following predictions:

  1. Remaining NPV 10 of over US$90 billion – Top twenty operators will generate nearly US$86 billion in value, combined. These operators are forecast to spend nearly US$110 billion and to drill over 25,000 wells through 2035.
  2. Capex of US$10.9 billion in 2014 – Marcellus continues to attract far more capital than any other gas play, but the distribution of drilling has changed. Nearly two thirds of rigs have shifted to southwest Pennsylvania and West Virginia, where operators are pursuing rich gas production.
  3. 20 bcfed by 2020 – Wood Mackenzie expects output to reach 20 bcfed by 2020, accounting for nearly 25% of total US gas supply.
  4. Core areas – The best areas are the Susquehanna Core, where huge wells make up for large price discounts to Henry Hub, and the Rich Gas Core straddling the West Virginia-Pennsylvania border, where liquids production can account for 65% of the total volumes. Near-term drilling will focus on the Bradford Area and the liquids-rich southwest sub-plays, which offer strong rates of return and thousands of remaining drilling locations. Conversely, development in central and northwest Pennsylvania is expected to remain minimal in the short term.
  5. Basis discounts remain steep – Large price differentials persist, especially in the Susquehanna Core and Bradford Area sub-plays in the northeast core, where we assume an average TN300 pricing discount of 37% to Henry Hub in 2014.
  6. Well results continue to improve – Estimated ultimate recoveries in the top areas have increased by approximately 10% since 2013, with longer laterals and high-volume completions.

Efficiency gains coupled with increases in lateral lengths and the recent practice of using large water and proppant volumes have led to flat, or increasing, well costs.

Many companies, including EQT, CONSOL, Antero, and Range, are seeing increased recoveries per lateral foot through the use of reduced frac cluster spacing (RCS), and continue to improve their completion processes. There is upside to the base case production forecast if large improvements in well recoveries are made across the play.

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