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North America steps on the gas with new investment

The four largest shale gas plays in the US will account for more than 10% of all North American upstream spending in 2013, according to UK consultants Wood Mackenzie

The Marcellus, Haynesville, Fayetteville and Barnett shales will see $14.5 billion of new investment out of a projected capital spend of $150bn, Houston-based research analyst Matt Woodson said. By comparison, tight-oil plays, such as the Eagle Ford, Bakken and Permian, will account for more than 40% of planned investment, or $60bn.

Fuelled by unconventional drilling, North American spending rose 27% in 2010, 31% in 2011 and just 4% in 2012, according to Barclays Capital, as gas prices plunged to decade lows of $2.80 per million British thermal units (Btu).

But after two years of flat growth, momentum is turning back to gas. Wood Mackenzie's Woodson sees the combination of higher Henry Hub futures and lower per-foot drilling costs as a precursor to higher activity levels starting in the summer months. "It's hard to predict future increases in drilling efficiency," he said. "But we're expecting to see gas rig growth in the second half of the year."

The Marcellus alone will see $9bn of new spending this year, mainly to bring on stream a backlog of 600-700 wells waiting tie-in and completion. Consequently, Marcellus production now totals about 25% of US shale gas output, or 72bn cubic metres (cm). Wood Mackenzie expects Marcellus output, which was negligible five years ago, to double again by 2020. Pennsylvania's gas production increased 69% in 2012, according to the state's Department of Environmental Protection, which oversees oil and gas in the state.

This growth has occurred during a time of low gas prices and relatively higher costs, as service companies scrambled to add pumping capacity for hydraulic fracturing (fracking). Pipeline bottlenecks are also impeding production growth, especially in Pennsylvania; Wood Mackenzie's spending estimates do not include mid-stream or downstream expenditure.

Woodson said low North American gas price prices have forced producers to become creative at targeting sweet spots of liquids-rich gas to improve the poor economics of dry gas. Bigger wells with longer laterals and higher numbers of frack stages are pushing the cost curve down, not just in the Marcellus but across all the US shale basins.

He said most US shale gas plays can now break even at $4/m Btu, which provides a boost for plays like the Haynesville. Other early stage plays, such as the Utica in Ohio, would also benefit from higher sustained prices.

Meanwhile, in its Midterm Gas Market Report, the International Energy Agency (IEA) said while US shales are now a key driver of global gas supply, shale gas growth will be largely confined to North America until at least 2018.

US gas production hit a record 681bn cubic metres (cm) in 2012, up 5% from 2011. The IEA sees US output rising to 797bn cm a year by 2018. Even with lower Henry Hub prices, shale gas' share of total US output rose to 39% from 34% in 2011. The IEA also estimated that more than 60% of North America's gas now comes shales, tight sands and coal-bed methane.

Moreover, the US and Canada accounted for 90% of the world's unconventional gas production in 2012 and all of its shale gas. But North American gas growth remains confined to the US; Canadian output fell 5% in 2012 in direct proportion to the surge south of its border. Canada's output will flatten and begin rising after 2015, when it begins exporting LNG, Wood Mackenzie said.

Shales continue to attract global attention, but IEA notes that the ingredients of the US unconventional gas boom - geology, liquid markets, private land ownership and established infrastructure - do not exist in many other regions of the world.

"This (shale gas) is and will remain a mainly North American gas story," it concludes. "This does not mean that nothing will happen outside North America over the medium term; rather that countries and companies are preparing the ground for unconventional gas production to take off by 2020, or not."

The report added that the rate of US shale gas growth will depend on unresolved issues such as the scale North American liquefied natural gas (LNG) exports, and substitution of coal-fired power. The addition of pipelines and downstream processing infrastructure will alleviate bottlenecks, which will allow growth to accelerate by the end of the decade.

About 315bn cm of incremental gas pipeline capacity is expected to come on stream through 2016, prompting the IEA to suggest US gas production over the later stages of the forecast period, from 2015-18, will be 40% higher than 2012-15.

All this will have an as yet undetermined impact on Henry Hub futures. The report assumes an average price of $4.60/m Btu in 2018, which will support capital investment decisions and infrastructure expansion. If this expected rise in prices comes to pass, the IEA said this year could be seen as a "potential break-out year" for US natural gas.

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