Big US Shale Field Marcellus Faces Output Drop Due To Low Gas Prices


May 28 (Reuters) - Natural gas production in the Marcellus shale, which has grown over the past decade from next to nothing to the source of about a fifth of U.S. output, may decline for the first time if prices in the basin remain low for much longer, according to federal government data.

Such a reduction may be worrisome since the United States is counting on the Marcellus to continue producing vast amounts of cheap gas needed to meet growing demand from industrial customers and power generators, and to enable the country to transition into a net gas exporter by 2017.

The U.S. Energy Information Administration says production in the fast-growing field in Pennsylvania and West Virginia is set to remain flat for the next few years before beginning a very slow decline primarily because of depressed gas prices.

Recent data supports signs of a slowdown. The number of rigs in the area has dwindled in recent months to its lowest since 2011, and drillers including Chesapeake Energy Corp and Cabot Oil & Gas Corp have temporarily shut in some production due to weak regional prices.

Those low prices are threatening the basin with its first annual decline in output since producers started using hydraulic fracturing and horizontal drilling to develop the formation.

But many private analysts say output from the Marcellus will continue to grow over the next several years as demand for gas increases and pipeline companies complete more projects to transport the fuel out of the region, boosting local prices that have fallen to their lowest in at least 14 years.

"We see some slow growth in the Marcellus each year out to 2020" because of new pipelines, said Keith Barnett, who heads fundamental analysis at Asset Risk Management LLC in Houston.

The EIA expects output to remain flat through 2018 before declining about 1 percent a year from 2019 to 2025, according to its 2015 Annual Energy Outlook.

"Relatively low gas prices, combined with low oil prices, have slowed drilling in the Marcellus so production from new wells is only offsetting the decline in old wells," said EIA lead upstream analyst Dana Van Wagener.

The EIA forecast prices in parts of the Marcellus would remain below $2 through 2016 and not exceed $4 until 2020.

"Many of the non-core areas of the Marcellus need prices to be sustained near $5 or above to be economic to develop," Van Wagener said, noting that price level would probably not be realized until around 2025.

Weak Prices

The sheer size of the Marcellus makes its continued growth vital to the expected expansion of the U.S. gas market. The basin produces twice as much gas as the nation's second-biggest shale oil and gas play, the Eagle Ford in South Texas.

But clearly the latest slump in prices is taking a toll.

Prices this year at Dominion South , an important Marcellus hub in southwestern Pennsylvania, have averaged $1.88 per million British thermal units on the IntercontinentalExchange, the lowest on record, according to Reuters data back to 2001.

An inability to move all the gas out of the Marcellus region has depressed prices there compared with the Gulf Coast benchmark, the Henry Hub in Louisiana, making it less attractive for local producers to drill more.

Energy companies have cut the number of rigs in the Marcellus to 66 from 81 a year earlier, according to data from oil services firm Baker Hughes Inc.

Production in the eastern United States, which includes the Marcellus and neighboring Utica shale in Ohio, was averaging 19.6 billion cubic feet per day so far in May, down from a record average high of 20 bcfd in December, according to data from Thomson Reuters Analytics.

"Some production declines this year are maintenance-related and should come back quickly, while others are economic," said Charles Nevle, vice president of energy data provider PointLogic in Houston.

But with reserves estimated at 64.9 trillion cubic feet - one-fifth of the U.S. total - there is little doubt that Marcellus will remain a workhorse.

"We are seeing declines so far this year in Marcellus production, but don't believe this is going to last," Nevle said. "There is plenty of gas available."

(Reporting by Scott DiSavino; Editing by Lisa Von Ahn)


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.