At this point, the narrative should be familiar. Over the past half decade, frenzied drilling activity in the nation’s shale plays has transformed the US from a natural-gas importer to the world’s leading producer.
The Marcellus Shale garners most of the plaudits for this structural shift, thanks to its superior economics and emergence as the nation’s top gas-producing play.
Between 2009 and 2013, output from this basin surged 620 percent to 4.2 trillion cubic feet. This momentum has continued into 2014, with natural-gas production climbing another 34 percent from year-ago levels over the nine months ended Sept. 30.
Through the first seven months of 2014, the Marcellus Shale has accounted for more than 20 percent of US natural-gas production, with soaring output in this area helping to offset declining volumes offshore and in the Haynesville Shale and other unconventional plays that have fallen out of favor.
Even more impressive, this production growth has occurred despite a relatively flat rig count in the Marcellus Shale since September 2012 and depressed natural-gas prices at Louisiana’s Henry Hub, the traditional pricing benchmark for the US.
First and foremost, the prolific nature of the Marcellus Shale means that even the areas that produce primarily natural gas and don’t contain significant volumes of margin-enhancing natural gas liquids (NGL) boast some of the lowest break-even rates in the US.
Even with natural-gas prices hovering around $2.00 per million British thermal units, operators with solid balance sheets and high-quality acreage can operate at a profit—the primary reason that drilling activity has remained robust in this region while declining in the Haynesville Shale and other basins that produce primarily natural gas. (See Breaking Down the US Onshore Rig Count.)
Moreover, producers in the Marcellus Shale continue to hone their production techniques, reducing drilling times and enhancing recovery rates. As operators become more comfortable with the play’s geology, production per rig has climbed. (We discussed some the technological and process innovations that have fueled these improvements in Salute Your Drillmasters: Efficiency Gains Lower Production Costs.)
But surging production in the Marcellus Shale has also created challenges for producers; the growing supply of natural gas and NGLs that exceeds local demand, depressing prices relative to the Gulf Coast and potentially prompting smaller operators that haven’t secured takeaway capacity to rein in production growth.
The growing discrepancy between the price of natural gas at the Leidy Hub near Ellisburg, Pennsylvania, and the Henry Hub in Louisiana underscores this challenge.
These widening price differentials have created the impetus for a number of pipeline projects that would transport these hydrocarbons to underserved end-markets in the South, Midwest and Northeast. (See Making Sense of the Marcellus Shale’s Midstream Madness.)
For the region’s producers, access to takeaway capacity has become increasingly critical to near-term profitability.
At the same time, producers appear keen to further improve their economics by taking more of their gathering activities in-house and monetizing these assets in a master limited partnership.
Hence, the recent initial public offerings of Antero Midstream Partners LP (NYSE: AM), a spin-off of Antero Resources (NYSE: AR), and CONE Midstream Partners LP (NYSE: CNNX), a joint venture between CONSOL Energy (NYSE: CNX) and Noble Energy (NYSE: NBL).
And the huge list of planned pipeline projects to transport natural gas from the Marcellus Shale suggests that the influx of these volumes to other regions could put further pressure on the Henry Hub prices that underpin futures traded on the New York Mercantile Exchange.
That’s yet another reason why investors shouldn’t bet on a meaningful recovery in US natural-gas prices.
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Elliott and Roger on Mar. 20, 2018
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