CERAWeek 2015: The elephant in the room: the Marcellus, the Utica and the natural gas market

Ed Kelly, Vice President, Americas Gas and Power Consulting, IHS, chaired the Strategic Dialogue "The Elephant in the Room: The Marcellus, the Utica, and the Natural Gas Market." Mr. Kelly opened the session by underscoring the significant impact of the Marcellus and Utica development on the supply dynamics and the pipeline grid in North America. He said that natural gas production is now expected to exceed 16 billion cubic feet per day (Bcf/d) in 2015 and will outstrip 20 Bcf/d by 2020, with the potential to grow to over 30 Bcf/d in 2030-35. IHS analysis indicates that there is over 211 trillion cubic feet of natural gas resource available at a break-even price of $3.25 per thousand cubic feet or less in the region.

Matthew Piatek, Associate Director, North American Gas, IHS, discussed three key messages. First, the Appalachian region has been infrastructure constrained, with the availability of takeaway pipelines being the most important driver of production growth. Recent waves of pipeline expansions have been fully utilized immediately, unleashing new supplies to the market, and he expects the trend to continue in the near term. Second, basis differentials in the region have been depressed owing to the lack of downstream market accessibility. Third, the US Northeast will become a net exporter of gas by the end of 2015, with half of the new infrastructure coming online over the next three years targeting outside markets. The scale, scope, and complexity of the infrastructure projects have increased over time, and costs have been gradually escalating.

Jeff Daniels, Director, Subsurface Energy Resources Center, The Ohio State University, focused on the upstream assessment of the Marcellus/Utica. He noted that the supply potential of the region depends on the viewpoint taken-whether by a landowner, investor, producer, or end user. Dr. Daniels emphasized that the capital for drilling and a return on investment, as well as regulations and the social acceptance of natural gas production at this scale, are paramount for sustainable supply. He added that new infrastructure developments also matter profoundly. Dr. Daniels suggested that more effort should be spent on understanding the geological complexity of both the Marcellus and the Utica, as well as on resource mapping, because the subsurface variability across the region is enormous. There is potential for the development of stacked pay zones and enhanced output over time, he said, although he noted that the industry should continue focusing on improving local demand for the product, as there is a deep inherent fear that we are stuck in a familiar boom-bust cycle.

Kyle Mork, President, Energy Corporation of America, provided the producer perspective of Marcellus/Utica development. The company has been active in the Appalachian region for many years and has amassed over 1 million acres of property. Over the past five to six years, technological improvements, company know-how, and better understanding of the geology have allowed Energy Corporation of America to reduce costs, complete wells faster, and ultimately grow its productivity and output significantly. Mr. Mork noted that producers themselves contribute to the problem of depressed prices; their performance improves even in a difficult price environment. He added, however, that a 20% return on some assets is common despite the low pricing. The industry is focusing on recompletions (refracturing existing wells) and drilling in a variety of new locations across the Utica. Mr. Mork said that he does not believe the existing oil-gas price differential will be sustained and that by using more natural gas the differential in the relative prices will shrink.

Ernie Thrasher, CEO, Xcoal and XLNG Energy & Resources, offered parallels between the coal and natural gas oversupply paths. He suggested that the solution to the natural gas glut lies in global markets (liquefied natural gas [LNG] exports), which will allow for the price distortion to be corrected. The critical factor, he added, is completing the necessary infrastructure to deliver the natural gas to the liquefaction terminals.

The panel took questions from the audience on public opposition to further resource development, local demand development, and other downstream markets. Dr. Daniels said that he has seen a marked change in attitude about the Marcellus/Utica in the local population from real hostility to acceptance, but that additional work on environmental issues is needed. Other panelists suggested that there is national-level skepticism toward LNG exports that often eclipses local development issues. Mr. Kelly wrapped up the session by explaining that depressed prices in the region hurt both producers and midstream developers.

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By Nikolay Filchev April 22, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.