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Appalachian shales continue natural gas boom: analysts, first Q1 reports

US natural gas prices will remain in the $4/MMBtu range this year while production growth in Appalachian shales will continue to be feverish, a consultant's new study and Barclays said Thursday.

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The energy consultants at Arlington, Virginia-based ICF International jacked up their long-term estimates of total production from the Utica and Marcellus shales by 9 Bcf/d through 2035, with the steepest increases in the next decade.

ICF said the Appalachian shale production will increase from roughly 15 Bcf/d now to 20 Bcf/d by 2016 and 30 Bcf/d by 2025, topping out at 34 Bcf/d by 2035.

ICF had previously forecast Appalachian gas would amount to slightly more than 25 Bcf/d by 2035.

The bulk of production, 83%, will come from the Marcellus, ICF said.

"Despite a slight downturn in the Marcellus rig count over the past year, output has grown as producers reduce drilling time and increase the production per well," ICF senior market specialist Frank Brock said. "The Utica, which was originally expected to have higher oil production, has had significant growth in gas production.

"Our past forecasts were conservative, with risk to the upside," Brock said. "Now, I think we're more optimistic and the risks are on the downside."

Short term, ICF sees gas production from the Marcellus growing in a $4/MMBtu price environment as producers benefit from the cold winter, work down a 1,000-well backlog and continue to improve the efficiency of their new wells, while at the same time 16 Bcf/d of new takeaway capacity comes online in increments through 2017.

ICF thinks gas prices will slump to the high-$3/MMBtu range next year as improved pipeline takeaway dumps more gas into the national market without any significant new sources of demand.

Prices will climb above $4/MMBtu in 2016 and climb to near $5/MMBtu by 2021 as demand increases from liquefied natural gas exports, Mexico, and new petrochemical plants needing feedstock.

Further out, "$5 to $6/MMBtu is high enough to support projected supply development, but not so high as to adversely impact market growth," ICF said.


Underlining the Marcellus Shale growth story were quarterly earnings reports from two large Marcellus drillers, Houston-based Cabot Oil & Gas and Pittsburgh's EQT. Both firms posted double-digit gas production growth and firmer-than-expected prices because of the cold winter.

Cabot said its Marcellus production averaged 1.2 Bcf/d in the first quarter, a 44% increase over the same period last year. By the end of April, Cabot said Marcellus production was at a record high of 1.5 Bcf/d.

Cabot's adjusted profits more than doubled to $109.7 million as it realized a better-than-expected $3.71/Mcf for its Appalachian gas on expenses of $2.66/Mcf, a $1.05/Mcf margin.

Cabot predicted its gas production would increase another 30% this year, with Williams' coming Constitution Pipeline solving any takeaway problems in its northeast Pennsylvania operating area.

On the southwestern side of the state, EQT nearly doubled its profits on a 50% increase in Marcellus volumes to nearly 1 Bcf/d. EQT realized $4.40/Mcf for its Marcellus gas as it took advantage of its own pipelines to deliver gas to premium markets.

EQT predicts it will grow its gas volumes 40% this year with only 36% of its anticipated production hedged at $4.36/Mcf.

EQT and Cabot are the first two of the six largest Appalachian producers to report results for the first quarter and Barclays gas analyst Biliana Pehlivanova thinks the gas growth story for 2014 has just begun.

"Our analysis suggests that production growth is not only here to stay, but that it is set to accelerate," Pehlivanova said Thursday in a note to clients. The Marcellus, Utica and associated gas form oil wells will drive growth, she said, while other areas such as the Haynesville Shale continue to decline.

She expects US dry gas output to increase 2.3 Bcf/d this year, slightly more than the 2 Bcf/d needed to refill storage stocks by the beginning of next winter.

The Appalachian shales continue to surprise, Pehlivanova said. In 2013, she expected the Marcellus and Utica shales to have 3.2 Bcf/d worth of growth. Instead, the two shales increased production 3.8 Bcf/d, she said.

In 2014, Pehlivanova expects the Marcellus and Utica growth story to continue in a $4.40/MMBtu price environment, as pipeline reversals and pipeline and processing plant additions create more takeaway capacity and allow producers to bring backlogged wells online.

--Bill Holland,
--Edited by Jason Lindquist,