Posted on 04/24/2015 6:03:02 AM PDT by thackney
Major improvements by natural gas exploration-and-production companies have allowed them to continue to drill profitably in a period of depressed prices, adding to the glut of gas and putting further pressure on prices, an E&P executive said Wednesday at the IHS CERAWeek conference in Houston.
"What's happening is that we continue to get better and get more production per rig," Kyle Mork, president of Energy Corporation of America, said in reference to the seeming paradox of growing US natural gas production despite a record low level of rigs.
"We're the problem," he said.
It is common knowledge in the industry that the main reason why natural gas prices -- both Henry Hub and prompt-month futures -- are trading at levels not seen since 2012 is because of the phenomenal growth in US natural gas production led by the Marcellus Shale.
"Northeast production is about 20 Bcf/d right now and the Marcellus is about 16 Bcf/d of that," Mork said. That represents an eightfold increase from 2010 Marcellus production levels of about 2 Bcf/d, according to US Energy Information Administration data.
This rapid growth is due to a combination of the play's vast resource base, industry-leading production costs and continued efficiency gains by operators.
"Not only are we drilling longer wells, not only are we drilling them more cheaply, but we're getting more recovery," Mork said.
The pace of improvements ECA, a privately held E&P with over a million leasehold acres in Appalachia, and others have seen is nothing short of remarkable. Back in 2009, ECA was spending about $1,800/lateral foot and recovering about 1.7 Bcf/1,000 feet of lateral.
But today, the Denver-based producer is spending roughly $1,100/foot of lateral and recovering 2.1 Bcf/1,000 feet of lateral, Mork said, while also drilling much longer laterals -- in excess of 10,000 feet compared with just 2,500 feet in 2009 -- with much higher initial production levels.
30-day IP rates for ECA's wells today are greater than 10 MMcf/d, up from 3 MMcf/d in 2009, while estimated ultimate recoveries are in excess of 20 Bcf, up fivefold from 4 Bcf in 2009.
"Today, we're drilling the best wells we've ever drilled," Mork said. "So that's part of the problem."
STILL PROFITABLE DESPITE 'UGLY' PRICING
ECA's improvements, which mirror those of the shale gas industry, are due to a variety of factors including technological advances.
"Some of it is advances in technology," Mork said. "Some of it is advances in our ability, and some of it is geology -- we're in areas where we have the ability to drill longer laterals.
"So you can see the problem. As gas prices come off... we continue to do better and better at drilling wells," he added.
Mork also talked about how natural gas at several Appalachian pricing points is trading at a heavy discount -- as high as $1.50/Mcf -- to Henry Hub cash prices. But despite wide basis differentials, ECA and other Marcellus drillers continue to earn sufficient rates of return.
"Even with this ugly pricing, we can get on [our] best wells about a 20% rate of return," Mork said. "So that is the problem is that there is still development going on even in an ugly pricing environment."
Though not all US shale producers are as profitable, illustrated by the recent spate of bankruptcies and credit downgrades, Mork's statements support the idea that depressed commodity prices are giving rise to a new, leaner industry.
A quote from a January report by Goldman Sachs commodities strategists seems apt: "A new industry will likely be born out of this environment with lower costs driven not only by cost deflation in other commodities, currencies, rig rates and oil services but also by substantial productivity gains created by engineers facing tighter margins."
Mork concluded his talk by saying that he doesn't think the price disparity between oil and natural gas on an energy-equivalent basis can continue forever.
"Smart people will resolve that [disparity]," he said.
"We will burn more gas and bridge that gap. And so from an industry perspective, I think that's a good thing. We've got an incredible resource, which hopefully will be used for many, many years."
More bad news for the Saudis.
I hope that oil production efficiency is growing as well.
U.S. Shale Oil: A Grand Parade Of Cost Improvements
http://seekingalpha.com/article/3095956-u-s-shale-oil-a-grand-parade-of-cost-improvements
Clearly this shows a need for an energy marketing board!
Modeled after the ever successful Raisin Administrative Committee. Under the auspices of the EPA/DOE/IRS.
The surplus natural gas, gasoline, heating oil... could be given to schools, the poor and the politically connected.
This in turn would cause most production to cease and drive prices to the moon.
At least they told what ECA Energy Corporation of America was but is IHS a High School or what?
The industry will get more efficient.
IHS CERAWeek is the premier annual international gathering of energy industry leaders, experts, government officials and policymakers, leaders from the technology, financial, and industrial communities – and energy technology innovators. This year marks the 34th anniversary of this influential event, ranked among the top five “corporate leader” conferences in the world. Midst the turbulence and uncertainty in energy markets this year, CERAWeek 2015 will provide new insights and critically-important dialogue — and a very cost efficient way to engage on the most urgent questions with decision-makers from around the world.
http://ceraweek.com/2015/about-ceraweek/
- - - - - -
In today’s global business economy, access to reliable, accurate data is crucial to making the best possible decision—every time.
As the premier provider of global market, industry and technical expertise, IHS understands the rigor that goes into decisions of great importance with solutions that meet the needs of our customers.
https://www.ihs.com/about/index.html
- - - - - -
Some of the companies I have worked out used IHS as a subscription service to provide access to hundreds (thousands?) of technical standards instead of needing to buy each one.
Some of the companies I have worked out used IHS....
Sounds like we need such an organization so we could work for freedom and liberty.
That article is more than a year old...
yep, am not as handy as you in drilling into newer data as I retired from the oil industry.
Point is the article you posted appears to confirm what was said by me in earlier post re Marcellus.
Were you referring to the bankruptcies, credit downgrades, or the reduction in drill rigs and jobs?
;-)
Cheers and have a great weekend.
am referring to our conversation about what constitutes ‘robust’ http://www.freerepublic.com/focus/f-news/3278975/posts
And being in retirement you never have to worry about the weekends: every day is the same.
You will experience that fact some day.
I understood. We continue to disagree on the description robust. Less equipment, fewer people, less demand... yada, yada...
Enjoy your weekend. We are headed to a rodeo tonight.
That description has to apply toward something, and, if you adjust it correctly, applies appropriately to a few strongholds like core Marcellus.
I can hardly believe their EURs have grown so much. No wonder they are still active. Technology advances, and even more poignantly in the core here.
I have a good friend who manages land activities for a major operator there, and he keeps me up on things.
In the related article you provided, about sharp declines in oil production costs, I saw this:
“While these very deep cost reductions for the E&P sector are unlikely to be sustained in the long run...”
Although some of the cost reduction is due to new techniques, a lot is due to the fact that the premium “boom town” prices that many had been able to charge during the boom are coming back down to Earth.
Rig counts are down, and US Steel recently announced major layoffs in their facilities that produce tube steel for the energy sector. To stay competitive in a shrinking market with more surplus supply, a lot of suppliers and service providers have to lower their prices to the companies exploring for and producing hydrocarbons.
Additionally, the articles mention that older/less efficient equipment has been preferentially shut down, so the remaining mix of gear has more efficient, newer stuff. The same applies to geology - the tougher spots on the margins of profitability are among the first to shut down, so the sweeter spots make up a higher percentage of what is left, reducing the average cost.
The essential point that efficiency has improved is true, but the speed at which this has occurred appears magnified by temporary market adjustments. Although costs have quickly dropped by a quarter or a third, only a small part of that improvement is the result of technological innovation.
Production costs for tightly bound shale oil and gas will inherently stay higher than production costs for Saudi reserves sitting in large pools under pressure, ready to gush out on its own. Frakkers are unlikely to ever make money at $10 a barrel, but they are continuing to push their price points down with innovative technology and good management.
I agree, less overtime, fewer premiums...
The essential point that efficiency has improved is true, but the speed at which this has occurred appears magnified by temporary market adjustments.
Related, we now have the older, less "efficient" equipment laid down first. The more marginal portions of the plays are set aside for later higher prices. The lesser workers laid off while keeping the experienced motivated workers.
So you have have the best working with the best on the best, so to speak. In addition to not having some of the premium prices, you have a better selection to be productive. It keeps the costs down as well.
All part of out of the boom cycle...
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