Marcellus Shale: What To Expect In 2010

By Eric Fox | January 22, 2010 AAA

Shale became a household word during recent months for millions of people living in the Northeast, as the exploration and production industry arrived on their doorsteps en masse to develop the Marcellus Shale, a sedimentary rock containing large quantities of natural gas. Pennsylvania saw the most development, with some interest in West Virginia as well. (For additional insight into the energy market, read What Determines Gas Prices.)

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Range Resources (NYSE:RRC) was far ahead of many others in developing its acreage in the Marcellus Shale. The company has more than 1.4 million acres prospective for the shale in its inventory. Range Resources has drilled 320 wells and was producing 80 million cubic feet equivalent (mmcfe) per day as of the end of November 2009. The company said it would produce as much as 100 mmcfe by year-end, and double that by the end of 2010.

Other operators were just getting started in the Marcellus Shale. Ultra Petroleum (NYSE:UPL), which has been developing its enviable position in the Pinedale in Wyoming, began its horizontal Marcellus Shale program, which has been running for the past year.

There have been a few bumps on the path to nirvana for an operator in the Marcellus Shale. Environmental opposition built rapidly during the year as residents began to understand the implications of the drilling methods used to unlock the shale resources. This opposition reached a shrill pitch as the industry moved closer and closer to New York City and its hallowed watershed.

The moratorium on drilling these types of wells imposed by David Paterson, the governor of New York, has remained a continuous debate. In September 2009, the state released the long-awaited Supplemental Generic Environmental Impact Statement that would detail the procedures operators would have to follow to obtain permits to expand drilling operations.

Despite this movement toward drilling in New York, landowners in the Southern tier of New York could only look on in resentment, and perhaps rage, as its neighbors across the border in Pennsylvania got rich from bonuses and royalties.

Aubrey McClendon, the CEO of Chesapeake Energy (NYSE:CHK), even offered to voluntarily refrain from applying for permits to drill on its acreage in the New York City watershed. This offer underscores the immensity of the area that the Marcellus Shale covers, as it underlies parts of seven states in the Northeast.

Cabot Oil and Gas (NYSE:COG) had a well-publicized accident at one of its well sites in Pennsylvania, where thousands of gallons of hydraulic fluid spilled in three separate incidents. The Pennsylvania Department of Environmental Protection fined the company, and the incident couldn't have come at a worse time as the opposition to hydraulic fracturing begins to build.

The exploration and production industry moved rapidly to lock up acreage in the emerging core area of the Marcellus Shale in Pennsylvania, and provided a stark reminder to millions of Americans who were unaccustomed to oil and gas drilling that the road to energy independence for the United States will not be free of sacrifice. (To learn about investing into energy companies, read Oil and Gas Industry Primer.)

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