Why Marcellus Production Is Poised to Keep Growing

In recent years, U.S. natural gas output has seen a phenomenal surge thanks largely to the application of advanced drilling techniques such as hydraulic fracturing and horizontal drilling. From 2005 to 2012, annual dry gas production soared 33% from 18.05 trillion cubic feet to 24.06 trillion cubic feet, according to the Energy Information Administration.

Incredibly, production continues to grow, despite low prices that have led many producers to curtail or halt their dry gas drilling programs. However, a closer analysis reveals that recent output growth has been heavily concentrated among just a couple of plays, mainly the Marcellus shale of Pennsylvania and West Virginia, and also the Utica shale of Ohio.

The EIA reported that production from these sites and other nontraditional plays is up 14% year over year, easily offsetting production declines from other shale gas plays, such as the Haynesville shale of Louisiana and Texas. Even more interesting, current Marcellus production may not even be close to its true potential.

A backlog in the Marcellus
That's because there is currently a huge backlog of wells that have been drilled but aren't producing, mainly because they haven't yet been connected to pipelines. A Barclays report found According the number of backlogged wells in the Pennsylvania Marcellus grew to 1,546 in the first half of this year, up 8% from the first six months of 2012, despite a drop in the number of rigs operating in the play.

Not surprisingly, several Marcellus producers reported large backlogs in the second quarter. Range Resources (NYSE: RRC  ) , for instance, said it had 41 backlogged wells as of the end of the quarter, while Cabot Oil & Gas (NYSE: COG  ) reported 37 wells awaiting completion or connection to a pipeline.

Over the next year and a half, the number of backlogged wells is expected to fall sharply as new pipelines and processing infrastructure go into service. Barclays reckons that if all the backlogged wells were brought online over the next year, Marcellus production growth could exceed even last year's record levels.

Marcellus infrastructure build-out
Two major companies driving this infrastructure build-out are MarkWest Energy Partners (NYSE: MWE  ) and Sunoco Logistics Partners (NYSE: SXL  ) . The two companies are jointly developing the long-awaited Mariner West pipeline, which will deliver natural gas liquids from the Marcellus to markets in Ontario, Canada. The line is expected to begin operations by early next month; it will have an initial capacity of 10,000 barrels per day that will be increased to 50,000 by the end of the first quarter of 2014.

Once these and other projects come online, Marcellus producers will be able to reduce their backlogs and boost production. Range Resources reckons that three major upcoming projects -- Mariner West; Mariner East, whose ethane portion is expected to go into service by 2015; and the ATEX pipeline, a 1,230 mile natural gas liquids pipeline currently being developed by Enterprise Products Partners (NYSE: EPD  ) that is scheduled to come online early next year -- will allow the company to grow its net production, including wet and dry gas, to more than 3 billion cubic feet equivalent by 2015.

Greater outputs on the horizon at Marcellus, Utica
All told, upcoming improvements in processing and takeaway capacity bode well for Marcellus gas producers and should ensure that the play's output of dry gas and natural gas liquids continues to grow. As some of the aforementioned projects come online, output from the Marcellus and Utica shales could increase by an additional 46% this year and by another 29% next year, according  to Barclays analyst Shiyang Wang.

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