The manufacturing of natural gas in the United States is here; shale gas operators have now become the swing producer of the United States. What does this mean? In late 2016, natural gas exports eclipsed imports becoming a net exporter of natural gas for the first time in the history of the United States oil and gas industry. In addition, with the expected continued growth of the LNG industry, more opportunities to export supply to international markets are becoming available. The combination of having ample daily production and robust reserves, in turn, affects market prices by balancing supply and demand through our capability to quickly ‘turn on wells’ increasing (or decreasing) output. According to EIA, at current rates, the US have over 10 years of proved gas reserves and almost 30 years of technically recoverable reserves. The United States’ ability to quickly manufacture gas is curtailing the ceiling of natural gas prices. However, despite ‘lower for longer’ prices, many operators are showing they can produce more with fewer rigs.
As larger natural gas reserves are being exploited in the Northeast, many E&P’s are continuing to optimize wells by fine-tuning completion practices and lowering operating costs in the current prolific, unconventional plays. For example, the Marcellus region’s natural gas production since 2012 has been increasing albeit with fewer rigs. As shown in Figure 1, in 2015 new-well gas production on a per rig basis for the Marcellus Region was roughly 9 MMcf/d compared to 13.8 MMcf/d in 2017. This, of course, is an average, not ignoring the wells that come on below this rate due to curtailment. Many wells have initial potential capacity of 20-30 MMcf/d but are being curtailed to 15 MMcf/d, which may be capping new-well gas productivity per rig. It is important to note that even more than oil wells, choke management plays a much bigger role for gas wells, which in return allows production to be held relatively flat for a longer period of time, which many believe also increases ultimate recoveries.
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For a high-level perspective, the United States is producing roughly 71 Bcf of dry natural gas per day, while the Marcellus comprises approximately 15 Bcf per day of this total.
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So, let’s ask the question, ‘how many rigs would it take to maintain production levels in the Marcellus?’ Ignoring the fact that new wells are producing flat, and assuming 15 Bcf/d declines at 10% per year, 1.5 Bcf/d would be needed to make up this decline. At roughly 15 MMcfd/well, it only takes 8 rigs running that each produce a well per month. This almost seems contrarian in logic, but according to Drilling Info, Antero Resources and Rice Energy are currently running 4 rigs each (compared to 15 rigs two years ago) and producing more dry gas. What this shows is that most of the top-tier operators are becoming more dynamic in relation to the market.
So what to expect next?
The high rig counts of 2008-2012 are a thing of the past. The old adage approach to unconventionals has shifted as producers have become more operationally efficient due to economies of scale and higher competencies in their understanding of completion techniques (well spacing, lateral length, proppant, etc). In 2008-2014, favorable commodity prices allowed operators the necessary breathing room to expend an extensive amount of input capital to drill and complete wells relatively ‘freely.’ As rig counts increased, this free-form renaissance allowed companies to drill, complete and produce wells at unprecedented rates, undeterred, so-to-say, by inefficiency. Now, one of the main drivers to higher productive indices is efficiency coupled with improving technology – which essentially has resulted in natural gas being manufactured here in the United States.