Natural gas production growth in the Marcellus Shale could meet last year's levels, even with some moderation of drilling in the region, as a backlog of wells wait to be brought online, analysts with Barclays Research said Wednesday in a new report.
While there is a widespread consensus in the gas industry, the backlog of wells is significant -- estimates vary from as little as 200-300 wells to well over 1,000, the analysts said in a Barclays report called "Marcellus: Promised Land."
The Office of Oil and Gas Management at the Pennsylvania Department of Environmental Protection, which oversees the most active drilling area of the Marcellus, indicates some 1,432 unconventional wells either were "temporarily shut in" or "spud, drilling but not completed" in the state in the second half of last year.
But that data could be underestimated, as discrepancies exist in the way the data is categorized year by year, the analysts said.
"Given the magnitude of latent production, we believe the drilling backlog in the Marcellus is unlikely to be worked off in 2013, and will carry into 2014 at least in part," the report stated. "Even with a moderation of drilling from current levels, we believe Marcellus could repeat its 2012 production growth this year. This would bring Marcellus production to an average of 10.6 Bcf/d in 2013."
Using the 1,432 wells estimate, the analysts said production growth would average nearly 3 Bcf/d year on year in the first year if the entire backlog of wells was brought online over a one-year period. And while declines would occur in the second year, on average for the year output would only drop 150,000 Mcf/d, they said.
Declines steepen substantially in the third year to an average of 1.2 Bcf/d year on year. In the fourth and fifth year, the analysts project aggregate production to fall an average of 350,000 Mcf/d and 175,000 Mcf/d, respectively.
Just how quickly producers work off the backlog of wells will depend largely on the expansion of pipeline and processing infrastructure, the analysts said.
"Pipeline capacity in the Marcellus grew by 2.8 Bcf/d in 2012, unlocking some of the latent supply," the analysts said. "This year, we expect a considerable amount of additions, with about 1 Bcf/d under construction, 1 Bcf/d approved or proposed, and another 800,000 Mcf/d in planning stages."
Most of these capacity additions are concentrated in the Northeast of the Marcellus, where most of the backlog exists.
Meanwhile, some 630,000 Mcf/d in processing capacity was added in 2012, with another 1.9 Bcf/d expected this year, concentrated mostly in the southwestern Marcellus and debottlenecking mostly wet wells in the region.
And while the analysts do not expect drilling in the Marcellus to stop, a slowdown in drilling and producer announcements of rig cuts does make production growth in the region unclear.
Marcellus production began 2012 at less than 6 Bcf/d, but has grown to more than 9.3 Bcf/d currently. This growth comes even as the rig count in the play dropped 15% in 2012.
But pad drilling, reduced well spacing and the drilling of longer laterals with more frack stages have all enabled greater production growth with fewer rigs and greater estimated ultimate recoveries.
"Indeed, efficiency gains have been a notable driver of natural gas production growth over the past four years, and will likely continue to play a significant role this year and next," the analysts said.
