Is the Marcellus boom ending?

A first look at permits issued, rig counts, and new wells added

The Marcellus shale is the great hope for keeping the United States’ shale gas boom going. The Marcellus has, so far, lived up to that hope, becoming the nation’s highest producing shale gas play. Natural gas production in the Marcellus, as regular news updates have pointed out, has been booming, soaring, growing faster than expected—even “reshaping America.”

So how long will it keep growing? The U.S. government’s own energy watchdogs, the Energy Information Administration (EIA), see no limits in sight. EIA director Adam Siemienski said in December: “For natural gas, EIA has no doubt at all that production can continue to grow all the way out to 2040.”

But I think we should take a skeptical look at the EIA’s forecasts, if only to try to how strongly they’re backed up. In doing the research for my upcoming book, The Oracle of Oil (the first biography of geologist M. King Hubbert, known for his forecasts for peaks of oil and gas production), I’ve seen how many forecasts—including the EIA’s—have been far off the mark. (Yes, even Hubbert’s forecasts, while in many ways prophetic, had their failings, too.) None of these forecasts should simply be taken at face value.

So I’ve been vacuuming up all the data I can get my hands on—that is, freely available, public data—and have assembled some graphs here showing the rates of new permits issued and rig counts, rates of new wells drilled and those starting production.

I don’t have any big conclusions to draw from this data—not yet, anyway. But since I hadn’t seen that anyone had posted this data on the rates of new permits issued and new wells starting to produce, I wanted to put it out there to see what people have to say.

First, we can see that these permits have gone through a boom and decline, but over the past 18 months or so have been on an apparent plateau—a bumpy one, but with no discernible trend up or down.

drilling permit data from State of Pennsylvania database; data smoothed with 11-month centered moving average

Here’s the rate of permits compared with the rig counts. They show similar patterns, pretty closely in sync. Similarly, the next graph adds the data for wells drilled each month, which is again very closely in sync with the pattern for permits and the rig counts.

rig counts from EIA’s “Drilling Productivity Report”

data on wells drilled from State of Pennsylvania database

Finally, here’s the data I’ve compiled on the number of new wells added each month—specifically the horizontal wells that Pennsylvania classified as Marcellus or unconventional.

data on new wells entering production based on Pennsylvania Department of Environmental Protection database; author’s analysis

Starting in mid-2012, the number of new shale gas wells—that is, horizontal, unconventional wells—plateaued.

So the big question is: What happens if the number of new wells added plateaus for a while—or even starts to drop off? Is the Marcellus drilling boom ending?

I’m curious what readers think. Is this drop-off in permits and drilling just a temporary blip? If natural gas prices rise, will Marcellus drilling pick up its pace again? Is it hitting temporary barriers—say, lack of enough fracking crews, or enough pipelines?

Or is this shale gas play simply settling into a mature phase that will last for a long time?

Or is it a more worrying sign that the addition of new wells has leveled off? One reason why I’m concerned about these trends is that shale wells have such a sharp decline in production after they’re initially opened up. That means you have to keep drilling wells at a high rate to keep the overall production level. Adding up a bunch of these sharply declining wells, you get an increasingly steep treadmill that the industry has to cope with, having to run faster and faster just to stay in one place—the old Red Queen analogy. This is shown well in this graph from an in-depth University of Texas study of Barnett shale gas production.

Barnett shale gas production: history and forecast, from University of Texas

The Barnett was the shale gas play that kicked off the whole “shale revolution”—but, according to this University of Texas study, it has apparently already passed its peak. According to that study, doubling the price of natural gas—from $3/Mcf to $6/Mcf—would only produce a modest amount more gas, enough to delay the peak by about 18 months. More than tripling the price of gas from that base level, to $10/Mcf, would delay the peak about 4 years, to 2017. That is, raising the price of gas a lot would make little difference in the Barnett.

I’m looking forward to seeing the University of Texas’s analysis of other shale plays, which are still in the works.

But for now, we can ask: In the Marcellus, what does the leveling off of new wells mean?

The EIA has estimated that there’s plenty more drilling to do—that compared with the roughly 4,000 Marcellus wells so far, the area could hold enough places for some 90,000 wells. So the EIA and others who see a long, bright future for the Marcellus would likely say that the recent leveling off is just a blip—and that there’s much more drilling to come.

Any forecast for the Marcellus depends also on understanding how prolific the average wells is at any point in time. It’s possible that the industry is doing better at avoiding drilling duds or outside the sweet spots. In future posts I’ll take a closer look at that possibility, drawing on data from the State of Pennsylvania that shows the performance of each Marcellus well. I’ll also look at the performance of the top counties, and of individual companies.

Here’s a teaser of that data, through the end of June 2013:

Cumulative natural gas production in billion cubic feet (Bcf) and cumulative producing days, from Pennsylvania database

More to come!

cover photo: courtesy of Daniel Foster, Pixsy.com