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 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 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.)
This graph from CONE Midstream Partners’ IPO road show presentation displays natural-gas prices at which various shale plays will deliver a 15 percent internal rate of return and situates its acreage dedication within this spectrum.
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.)
No. 3: Strong Parents
CONE Midstream Partners’ sponsors, CONSOL Energy and Noble Energy, have drilled 356 horizontal wells in the Marcellus Shale since the start of 2011. The partners estimate that the MLP’s acreage dedication boasts an inventory of 5,700 drilling locations.
And both companies continue to push the envelope with drilling and supply-chain efficiency while optimizing well design and completion techniques to boost production per well.
All told, the upstream joint venture surpassed 875 million cubic feet of natural-gas equivalent production in the third quarter, an increase of 16.7 percent from the second quarter.
Noble Energy in the second quarter drilled a 5,870-foot lateral in less than 24 hours and in the third quarter sank a 12,425-foot horizontal well in only three days—both records for the Marcellus Shale.
Meanwhile, pilot programs to reduce the spacing between drilling locations and the fracturing stages within these horizontel wells have improved Noble Energy’s recovery rates significantly.
CONSOL Energy operates the dry-gas portion of the joint venture’s area of mutual interest and has likewise lowered production costs by drilling larger laterals and increasing the number of stages.
The upstream partners have also found that re-fracturing and re-completing older wells using updated techniques can deliver production that, in some instances, is on par with their initial flow rates.
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.
Fortunately, Noble Energy and CONSOL Energy have secured more than 1 billion cubic feet per day of firm transportation capacity on major pipelines to ship natural gas to markets that offer superior price realizations.
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Elliott and Roger on Feb. 27, 2018
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