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Highlights

Major improvements by natural gas exploration-and-production companies have allowed them to continue to drill profitably in a period of depressed prices, adding to the glut of gas and putting further pressure on prices, an E&P executive said Wednesday at the IHS CERAWeek conference in Houston.

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"What's happening is that we continue to get better and get more production per rig," Kyle Mork, president of Energy Corporation of America, said in reference to the seeming paradox of growing US natural gas production despite a record low level of rigs.

"We're the problem," he said.

It is common knowledge in the industry that the main reason why natural gas prices -- both Henry Hub and prompt-month futures -- are trading at levels not seen since 2012 is because of the phenomenal growth in US natural gas production led by the Marcellus Shale.


"Northeast production is about 20 Bcf/d right now and the Marcellus is about 16 Bcf/d of that," Mork said. That represents an eightfold increase from 2010 Marcellus production levels of about 2 Bcf/d, according to US Energy Information Administration data.

This rapid growth is due to a combination of the play's vast resource base, industry-leading production costs and continued efficiency gains by operators.

"Not only are we drilling longer wells, not only are we drilling them more cheaply, but we're getting more recovery," Mork said.

The pace of improvements ECA, a privately held E&P with over a million leasehold acres in Appalachia, and others have seen is nothing short of remarkable. Back in 2009, ECA was spending about $1,800/lateral foot and recovering about 1.7 Bcf/1,000 feet of lateral.

But today, the Denver-based producer is spending roughly $1,100/foot of lateral and recovering 2.1 Bcf/1,000 feet of lateral, Mork said, while also drilling much longer laterals -- in excess of 10,000 feet compared with just 2,500 feet in 2009 -- with much higher initial production levels.

30-day IP rates for ECA's wells today are greater than 10 MMcf/d, up from 3 MMcf/d in 2009, while estimated ultimate recoveries are in excess of 20 Bcf, up fivefold from 4 Bcf in 2009.

"Today, we're drilling the best wells we've ever drilled," Mork said. "So that's part of the problem."

STILL PROFITABLE DESPITE 'UGLY' PRICING

ECA's improvements, which mirror those of the shale gas industry, are due to a variety of factors including technological advances.

"Some of it is advances in technology," Mork said. "Some of it is advances in our ability, and some of it is geology -- we're in areas where we have the ability to drill longer laterals.

"So you can see the problem. As gas prices come off... we continue to do better and better at drilling wells," he added.

Mork also talked about how natural gas at several Appalachian pricing points is trading at a heavy discount -- as high as $1.50/Mcf -- to Henry Hub cash prices. But despite wide basis differentials, ECA and other Marcellus drillers continue to earn sufficient rates of return.

"Even with this ugly pricing, we can get on [our] best wells about a 20% rate of return," Mork said. "So that is the problem is that there is still development going on even in an ugly pricing environment."

Though not all US shale producers are as profitable, illustrated by the recent spate of bankruptcies and credit downgrades, Mork's statements support the idea that depressed commodity prices are giving rise to a new, leaner industry.

A quote from a January report by Goldman Sachs commodities strategists seems apt: "A new industry will likely be born out of this environment with lower costs driven not only by cost deflation in other commodities, currencies, rig rates and oil services but also by substantial productivity gains created by engineers facing tighter margins."

Mork concluded his talk by saying that he doesn't think the price disparity between oil and natural gas on an energy-equivalent basis can continue forever.

"Smart people will resolve that [disparity]," he said.

"We will burn more gas and bridge that gap. And so from an industry perspective, I think that's a good thing. We've got an incredible resource, which hopefully will be used for many, many years."

--Arjun Sreekumar, arjun.sreekumar@platts.com
--Edited by Jason Lindquist, jason.lindquist@platts.com