January 15, 2016
Oil prices have taken a dive from the highs of summer 2014,
and high production has kept natural gas prices at sustained lows. Despite sinking profits, production remains high, thanks in large part to the major shale regions in the United States. In particular, the Marcellus and Utica plays have made the Northeast United States a shining beacon of energy production.
Since 2012, the Marcellus and Utica plays have provided 85 percent of U.S. shale gas production growth, with productivity of natural gas wells in the region steadily increasing because of ongoing improvements in precision and efficiency of horizontal drilling and hydraulic fracturing, according to the U.S. Energy Information Administration (EIA). Collectively, shale gas production from the Marcellus and Utica regions increased by 12.6 billion cubic feet per day (Bcf/d) from January 2012 to June 2015, making these regions the driving forces behind overall U.S. natural gas production growth.
The Marcellus alone accounted for 21 percent of the natural gas produced in the United States during the first five months of 2015, according to the EIA, which reported that in August 2015 the Marcellus would produce 16.5 Bcf/d and the Utica would produce 2.7 Bcf/d.
The Marcellus and Utica shale lie beneath a large section of the Northeast United States and parts of Canada. However, most of the oil and gas activity is concentrated in the tristate region of Ohio, Pennsylvania and West Virginia.
In 2008, experts estimated that the Marcellus shale contained more than 500 trillion cubic feet (Tcf) of natural gas, with about 10 percent of that being recoverable, which would be enough to supply the entire United States for about two years and have a wellhead value of about $1 trillion dollars, according to Geology.com, an online resource published by Hobart King, Ph.D., a licensed professional geologist in Pennsylvania.
In 2011, however, the EIA reported that the Marcellus shale contained approximately 410 Tcf of technically recoverable natural gas. The following year the agency revised that number down to 141 Tcf, as it’s difficult to estimate the amount of gas in a rock unit that varies in thickness, composition and character and is located thousands of feet underground.
By early 2015, the Marcellus shale was yielding about 14.4 Bcf/d of natural gas. In addition, wells in the western part of the play, near the Pennsylvania-Ohio border and westward, were yielding valuable natural gas liquids (NGL) and small amounts of oil.
The Utica shale lies a few thousand feet below the Marcellus and is thicker than the Marcellus, more geographically extensive and has already shown that it can be of commercial value. The U.S. Geological Survey estimates that the Utica shale’s undiscovered, technically recoverable unconventional resources contain about 38 Tcf of natural gas, about 940 million barrels of oil and 208 million barrels of NGLs.
Most of the drilling activity in the Utica shale has occurred in eastern Ohio, where it is closer to the surface. The Ohio Department of Natural Resources estimates a recoverable Utica Shale potential between 1.3 and 5.5 billion barrels of oil and between 3.8 and 15.7 Tcf of natural gas.
The Marcellus and Utica shale has made the tristate region one of the strongest production areas in North America. However, without enough pipelines to ship natural gas out of the region, profits have sunk, prompting companies to look for ways to save on costs and boost revenues, including cutting jobs and improving efficiency.
Job cuts in the oil and gas industry have reached more than 195,000 worldwide, according to some estimates. In August alone, U.S. oil and gas companies and supporting service firms laid off 8,300 workers, according to data released Sept. 4 by the Bureau of Labor Statistics. By contrast, other U.S. industries added 173,000 jobs in August.
The number of workers providing support activities for mining, which includes the extraction of oil and gas, dropped by 2 percent, or about 7,200 jobs, according to an article by Jennifer A. Dlouhy of the Houston Chronicle’s FuelFix.com. Another 1,100 oil and gas extraction jobs also were lost in August, representing about 1 percent of that particular workforce.
Since oil prices started their descent in June 2014, when U.S. benchmark West Texas Intermediate crude topped out at $107.26 per barrel, the deepest cuts have come from the ranks of oilfield service firms and drilling contractors, not the upstream exploration workforce. Dlouhy reports that about 14 percent of the country’s mining support jobs have been cut since July 2014 compared to about 3 percent of upstream oil and gas extraction jobs during the same time.
However, the BLS data may not show the whole picture. Oklahoma-based Continental Resources estimates more than 90,000 lost jobs across the energy industry since prices started falling last summer, Dlouhy writes. And more recently, ConocoPhillips announced Sept. 1 that it would cut about 10 percent of its global workforce.
To combat a contracting workforce and to make up for low prices, companies are seeking efficiency gains in the hydraulic fracturing process. The U.S. Department of Energy’s National Energy Technology Laboratory (NETL) and its partners, West Virginia University (WVU), Northeast Natural Energy (NNE) and The Ohio State University, have been studying unconventional gas production in the Marcellus shale in part to improve operational efficiency.
As part of the Marcellus Shale Energy and Environmental Laboratory (MSEEL) project launched in fall 2014, the research team began drilling an observational well in Morgantown, W.Va., on June 27, 2015. The project will facilitate a number of research topics and provide a venue to train and educate next-generation scientists and engineers.
Researchers will use the vertical science well, situated between the two horizontal production wells, to gather valuable information that will assist with optimizing well placement and hydraulic fracture design within the Marcellus shale.
During final drilling and completion operations of the two production wells later this fall, NNE will deploy technologies not yet widely used in the industry to assess their potential to improve operational efficiency and lower the overall environmental footprint of unconventional oil and gas operations. Some of these technologies include bi-fuel (e.g., natural gas and diesel) drilling and completion units, dissolvable fracture plugs, coil-assisted fracturing and dynamically engineered fracture design based on logging-while-drilling of the production laterals.
While the industry seeks to improve efficiency during this market downturn, natural gas production across all major shale regions is projected to decrease for the first time in September, according to the EIA. In its Aug. 26, 2015, Drilling Productivity Report, a near-term assessment of the Marcellus, Utica, Bakken, Eagle Ford, Haynesville, Permian and Niobrara plays, all but the Utica were scheduled for a drop off.
Production from these seven shale regions reached a high in May 2015 at 45.6 billion cubic feet per day (Bcf/d) and was expected to decline to 44.9 Bcf/d that September, the EIA reported. In each region, production from new wells is not large enough to offset production declines from existing, legacy wells.
The Utica region in eastern Ohio was the only region expected to show production increases in June, July and August, 2015, according to the EIA. New-well natural gas production per rig is estimated to be about 7 MMcf/d, an increase of 47 percent from September 2014. Production from new wells is expected to reach 52.2 MMcf/d in September, partially countering the decline from legacy wells in the Utica.
However, the overall pace of drilling in the Utica has fallen as a result of low benchmark prices, according to an Aug. 9 article by Shane Hoover of the Canton (Ohio) Repository. Rig counts have declined in Ohio from 59 rigs operating in December 2014 to 20 as of Aug. 1, 2015. Benchmark natural-gas prices dropped from a high around $6 per 1,000 cubic feet in February 2014 to a low of $2.68 in April 2015, and prices are projected to stay below $4 per 1,000 cubic feet for the next several years as production exceeds demand. In some parts of Pennsylvania, prices as low as $1 per 1,000 cubic feet were reported.
One way to improve revenues from Marcellus and Utica production is to move the product to a market with better prices. On Aug. 1, 2015, the Rockies Express Pipeline (REX) started to deliver 1.8 Bcf/d of Appalachian natural gas production west on its existing mainline as part of the Zone 3 East-to-West Project, delivering natural gas to the Midcontinent region, according to the EIA.
This increase in takeaway capacity may encourage increased production from regions such as the Marcellus and Utica. Other projects, such as Kinder Morgan’s Tennessee Gas Pipeline and Spectra Energy’s Texas Eastern Transmission, will add about 3.4 Bcf/d of capacity through 2017. Still others, such as NEXUS and Rover, are in the planning stages.
Even as natural gas production is expected to slowdown, the Marcellus-Utica tristate region is still expected to produce more than it can use and will become a net exporter in 2015, according to a Sept. 1, 2015, article by Pittsburgh Post-Gazette reporter Stephanie Ritenbaugh. Most Marcellus gas is sent to the Midwest, Southeast and Canada, but eventually it will have access to Mexico through pipelines and globally through liquefied natural gas (LNG) exports.
“In terms of global markets, a bevy of projects are in the works to export liquefied natural gas,” Ritenbaugh writes. “The closest such facility, Dominion Resource’s Cove Point project in Maryland, will be able to ship 0.7 Bcf/d of LNG overseas starting in late 2017. Late this year, Cheniere Energy’s Sabine Pass will begin shipping LNG from the Gulf Coast.”
By November 2015, infrastructure projects should bring about 3.9 Bcf/d of new capacity to the Northeast, with production forecasted to grow about 3.4 Bcf/d at that time, she adds, citing information from Bentek.
However, it’s not all doom and gloom. According to an annual report from the International Energy Agency (IEA), global demand for natural gas continues to grow.
Despite a marked slowdown in 2013 and 2014, lower prices will feed a pick-up in demand over the next five years. The IEA’s 2015 Medium-Term Gas Market Report released in June projected global demand for natural gas to rise by 2 percent per year by the end of 2020. That number is a slightly downward revision of previous projections that showed 2.3 percent yearly growth. A significant reason for the downward revision is weaker gas demand in Asia, where persistently high gas prices had caused consumers to switch to other options.
In the short term, gas demand will benefit from plunging prices, but the report adds that the long-term outlook for gas has become more uncertain.
“For the fuel to make sustained inroads in the energy mix, confidence in its long-term competitiveness must increase,” the report says.
On the supply side, the report notes that lower oil prices will have a major impact on gas upstream and infrastructure investment. Companies are cutting capital expenditures and refocusing on core assets with fast returns, which will unavoidably lead to slower production growth over the medium term.
Due to their capital-intensive nature and long lead times, LNG projects are soft targets for investment reductions and several of them are likely to be delayed or even cancelled, the IEA says. If current low prices persist, LNG markets could start tightening substantially by 2020, with demand gradually absorbing the large supply upswing expected over the next three years.
In the short term, gas markets will need to cope with a flood of new LNG supplies. The report projects global LNG export capacity to increase by more than 40 percent by 2020, with 90 percent of the additions coming from Australia and the United States. Lower oil prices pose little risk to the timing of projects already under construction. Project operators in the United States have limited price exposure once deals have been signed. New projects, however, will struggle to get off the ground at current prices.
As LNG supplies surge over the next five years, Europe is set to offer an important outlet for producers. The IEA report projects that the region’s LNG imports will roughly double between 2014 and 2020.
It’s clear that global demand for cheap energy will remain strong over the next five years, but producers must find a way to get their product to market. Meanwhile, efficiency gains can help shore up the bottom line during these lean times. The Marcellus and Utica shale plays provide an example of how companies can build out new infrastructure and find new uses for existing pipelines and facilities to improve their return on investment.