Marcellus and Utica basin natural gas producers will still be able to make money even if long-term prices do not substantially rise from current levels, speakers at a Platts oil and gas conference said Thursday.
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However, several panelists at Platts' annual Appalachian Oil & Gas conference in Pittsburgh agreed that prices would rise in the next several years. New markets for gas -- spurred by retirements of coal-fired electric generation plans, the growth of gas exports to Mexico and new exports of LNG -- combined with a strong markets for natural gas liquids produced in association with the gas stream, likely will incentive continued robust production growth in the Appalachian region, the speakers said.
"We see prices firming in the future," said panelist Kevin Petak, vice president of ICF International, on the sidelines of the Pittsburgh conference.
"That's premised on a few things," Petak said. "There's market growth behind that, significant market growth. LNG exports, Mexican exports, petchem load and gas-fired power generation, all of those are expected to develop robustly over the next few years."
Gas prices at the major Appalachian Basin pricing points should soon break out of the $2.50/MMBtu-$3/MMBtu range where they have been trending over the last year, Petak said.
"Low prices are kind of the cure to low prices," he said. "That motivates the market growth and then there's midstream infrastructure development, pipeline expansions that permit the molecules from the Appalachian Basin to get out of the area and get to the markets where the market growth is."
Future Marcellus and Utica gas production growth in the "is very much dependent on markets growing and infrastructure being developed" he added.
Offering an alternative scenario, in which gas prices remain relatively low, "eventually the capital markets would influence some degree of restraint on the producers," Petak said.
"At a certain point capex has to be rationalized and development has to be rationalized. If prices are relatively low, the capex can't continue at the rate it is continuing," he said.
Jeffry Lambujon, an associate with Tudor Pickering Holt, said Marcellus prices should increase somewhat in the near future as Northeastern midstream infrastructure is built out, alleviating some of the flow constraints in the basin. This in turn could help incentivize operators in the basin to continue to ramp up production.
Also speaking on the conference sideslines after the panel discussion, he said Tudor Pickering's modeling calls for a 65-cent differential to NYMEX gas price in the northeastern portion of the Marcellus and a 50-cent differential in the southwestern part of the basin in the 2015-16 time frame. Because different producers use different pricing metrics, this might influence their investment decisions and drilling schedules, Lambujon said.
Some producers base their price assumptions on a bid-week on a bid week average, while others might use a [Platts] Gas Daily last-day of bidweek price.
"It also depends on which company we look at," he said.
Lambujon cited a recent Tudor Pickering report that examined the breakeven economics for Marcellus producers to determine the conditions necessary for them to generate a 10% after-tax rate of return.
"We found of the rigs that are running, 80%-90% of them could generate returns still at sub-three bucks per Mcf with 55% of the rigs able to generate the returns at two bucks per Mcf," Lambujon said.
The latter conditions were found "in those counties where the returns were aided by strong liquids yield," he added.
"Depending on the operator and the quality of their acreage, some could still generate acceptable returns in poor pricing environments," he said.