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Unconventional Profits in the Marcellus Shale
By Keith Kohl | Tuesday, August 12th, 2008
"Are energy prices on the verge of turning around?"
I've been asked this question nearly every day since early July, after oil prices have fallen from over $147 per barrel. And as expected, the cost of natural gas dropped right alongside crude oil.
After reaching as high as $13.75/Mcf, natural gas has tumbled more than 40%.
However, we can't put all the blame on crude oil.
Today, the Energy Information Administration (EIA) released their Short-Term Energy Outlook. According to the report, U.S. domestic natural gas production increased 8% in 2008, yet consumption only grew by 3%.
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I hope that growth in production doesn't come as a surprise to my readers.
The fact is that unconventional natural gas basins have been heating up for a long time. I can remember being ridiculed for even hinting at the potential success in the Barnett shale. I believe the exact words were, "The Barnett shale is not the answer. There have been an overabundance of failures in the area and there are much better areas for development."
The success of horizontal drilling in the Barnett formation has made several other shale basins across the U.S. more attractive for producers.
The Marcellus Formation
Without question, one of the hottest unconventional plays in the U.S. is the Marcellus shale formation.
As you may know, the Marcellus formation stretches across New York, Pennsylvania, Ohio, Maryland and West Virginia
Earlier this year, the amount of natural gas reserves came into question by two professors, Terry Engalder and Gary Lash. Six years ago, the USGS had reported the Marcellus shales to have approximately 1.9 trillion cubic feet of "technically recoverable" natural gas.
Dr. Engalder and Dr. Lash have suggested a significantly higher number. Although their high estimate is around 500 trillion cubic feet, their conservative number of 167 trillion cubic feet of natural gas is still a massive amount.
The problem is figuring out how much of that natural gas could be recovered, yet even taking into account a 10% recoverability factor, the conservative number is nearly almost times larger than the USGS estimates.
Unfortunately, producing the natural gas in the Marcellus formation can be expensive since a horizontal well can cost triple the amount of a standard vertical well.
Unconventional Profits in Marcellus Gas
Despite the sharp price correction, prices may hit a bottom of $8 Mcf. Unlike oil, producers aren't struggling to meet demand. The question is: at what price level will producers begin to cut production? The end result would be a hike in natural gas prices.
Considering nearly all the major players have taken a beating since July, this could be a perfect opportunity to pick shares at a discount.
For example, take a closer look at Range Resources (NYSE: RRC). With 1.15 million net acres in the Marcellus shale play, Range has already drilled 25 horizontal wells in the play, 22 of which have been completed. Each horizontal shale well in the area is estimated to hold an average of 3-4 bcfe in reserves. Furthermore, production is projected to reach 30 Mmcfe per day during the first quarter of 2009.
Until next time,
Keith Kohl
Energy and Capital
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