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Bernstein calls shale gas efficiency gains 'terrifying' amid supply glut

The average initial production of a U.S. shale gas well rose 34% in 2016, an efficiency leap that can be a blessing or a curse depending on where you sit in the gas stream, Sanford C. Bernstein & Co. LLC's analysts said in an Aug. 7 research note.

Upstream companies focused on price are going to get hurt, while midstream companies depending on volume are going to be delighted as 17 Bcf/d of new gas needs to find a way to market, the analysts said.

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"Today's latest update of the Bernstein Gas Power index, on its face, is terrifying," gas analysts Jean Ann Salisbury and Bob Brackett told their clients. "The average gas [initial production, or IP] rate of wells is up a staggering 34% year on year. This was led by enormous improvements in the Utica (+76%), Haynesville (+45%), and the Marcellus (+25%)."

Among the recent IP breakthroughs is a monster 62-MMcf/d northeast Marcellus well that Chesapeake Energy Corp. unveiled in its Aug. 3 earnings report.

Subtracting the effects of high-grading, drilling in only the best rock and the steep decline curves of these high IPs, the "sustainable" increase in well output is probably between 5% and 10% in the coming years, Bernstein said. That gain, coming when drillers are already overproducing, is "even more bearish for our view of gas price, mixed but mostly negative for gassy E&Ps (more production but worse price), and bullish for gassy and NGL-y midstream [companies]," the Bernstein analysts said.

"We estimate that of the 34% improvement in gas IP rates in 2016, we believe 5%-10% is sustainable over the longer term as an average across all basins and run this as our base case," the analysts wrote. "We forecast rig counts in associated basins slightly below current levels over the next 3 years to remain roughly within cash flow. We grow Marcellus/Utica rigs by ~25 rigs to fill the coming pipelines by 2020. With overall improvements in the 5-10% range, this gives us more than enough gas to meet demand to 2020 (+17 Bcf/d from 2016)."

Bernstein's Gas Power Index, which converts all rigs into a whole or fraction of one of the land-crawling dry gas monsters found in the northeast Marcellus Shale, showed the U.S. at 126 Marcellus-equivalent rigs in a market where only 75 equivalent rigs are needed to keep production flat.

"We think something has to give between associated gas ramp, Marcellus/Utica spending to fill the pipes, and Haynesville rigs staying flat. ... It's probably the Haynesville first, but will do a deeper exploration into this," the Bernstein analysts promised.