What We Learned About The Marcellus Shale

By Eric Fox | August 04, 2009 AAA

Earnings season has reinforced the attraction of several North American shale plays currently being developed by the exploration and production industry. These include the Marcellus Shale, a vast shale formation in the Northeastern United States.

Companies are increasing acreage and improving well results as they apply better technology. Although most activity is currently centered in Pennsylvania, the play extends into several states, including New York, West Virginia and Ohio.

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Horizontal Is Better
Cabot Oil and Gas (NYSE:COG) updated its development progress in the Marcellus Shale in conjunction with second-quarter earnings. The company completed a horizontal well and reported an initial production rate of 10.3 Mmcf per day for a recent well. After 30 days the average rate was still high at 9.8 Mmcf per day.

Horizontal drilling is critical to these shale plays, and Cabot Oil and Gas proved this with its second completion in the Marcellus Shale. A well drilled vertically had an initial production rate of 4.2 Mmcf per day, not even 50% of the production of the horizontal.

Repeatable Plays and Leases
Range Resources (NYSE:RRC) also released an operations update. The company is now producing 50 Mmcfe per day of natural gas from its Marcellus acreage as of mid July 2009, and the company is producing from 41 of the 46 wells it has drilled there. During the conference call, the company gushed over the Marcellus.

"We believe this is the best rate of return and finding costs of any large scale, repeatable play in the United States," said Jeffrey Ventura, the President of Range Resources.

The play is apparently so attractive that some operators are still leasing acreage. CNX Gas (NYSE:CXG), which already had substantial acreage in the Marcellus Shake, just added 40,000 more acres. The company leased half its new acreage from CONSOL Energy (NYSE:CNX), its parent company, and the rest from a private owner.

Chesapeake Energy (NYSE:CHK) is the largest leaseholder in the Marcellus Shale, with 1.45 million acres in its portfolio. The company is currently operating with 15 rigs in the play, and will need 28 rigs by 2010 to fulfill its plan to drill 165 wells that year.

The Bottom Line
This continued push by the exploration and production industry into the Marcellus Shale is interesting considering that the fundamental outlook for natural gas prices is not that good, with high storage levels and depressed demand due to the recession. It seems that the industry is migrating its activity to these shale plays from higher cost areas.

The exploration and production industry is still rushing headlong into the Marcellus Shale, and with good reason, as the area is large and the wells are prolific now that the industry has perfected the technology to produce the vast unconventional resources that are abundant in North America. (For more, check out Become An Oil And Gas Futures Detective.)

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