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The rise and rise of US shale gas

Falling natural gas prices and a plunging rig count are doing little to slow the US shale-gas juggernaut

Henry Hub prices have fallen around 40% from around $4.40 per million British thermal units (Btu) in November last year to just $2.68/million Btu this week, nearing lows seen in early 2012. Prices have been even lower in areas inundated with new shale supplies. Prices for deliveries from the Marcellus shale on Tennessee's pipeline system are down to around $1.40/million Btu, according to the US Energy Information Administration (EIA).

At the same time, the gas-directed rig count is falling as drillers slash capital spending. The decline hasn't been as sharp as it has been for the oil-rig count, but it continues a multi-year decline for gas drilling rigs in the US. There are now around 268 rigs drilling for dry natural gas in the US, just 26% of the total rig count. That is 77 fewer than a year ago, a fraction of the peak in 2008 when there were around 1,600 gas-directed rigs in the field.

Still, production keeps rising, with no signs of a slowdown in sight. Shale-driven US natural gas output hit a record 74.3 billion cubic feet per day (cf/d) in December last year, and production for 2014 was up 6.1% from 2013, the highest growth rate since the peak of the shale gas boom in 2011. And there is no sign of a slowdown this year. The EIA expects supply to grow by another 5% this year to average 73.9 billion cf/d, and 2% next year to top 75 billion cf/d.

What's going on? For one, drillers continue to perfect the art of shale production. Producers are getting much more out of each well they drill. Moreover, costs are coming down across the sector, which has helped to offset declining natural gas prices, though at today's prices producers almost everywhere will struggle to profit. Costs could continue to come down for shale-gas drillers thanks to the sharp downturn in oil drilling activity.

Gas output could also benefit from the falling oil price as drillers revisit gas basins looked over in recent years because producers were funneling cash into more profitable oil wells. The oil-gas ratio, a measure of the relative value of producing the different hydrocarbons, has narrowed significantly in recent months. In 2012, when oil prices rose and US natural gas prices collapsed, that ratio rose to more than 50:1, at which point drillers herded into oil plays. Now the ratio is closer to 20:1, making natural gas drilling much more attractive. 

Supply growth has not been seen everywhere. The northeast of the US - notably the Marcellus and emerging Utica shale plays - is driving output higher, while production has stagnated or fallen in other areas, especially Texas.

The Marcellus shale continues to be the engine of the US natural gas industry. In spite of rock-bottom regional natural gas prices, producers continue to squeeze profits, and a lot of natural gas, from the play. Marcellus production hit 14.4 billion cf/d in January this month, around 20% of total US output. Production is twice the level it was in late 2012.

Producers in the Marcellus continue to reduce costs and wrench more efficiency out of their wells, which has made the shale play by far the most profitable in the US. The typical Marcellus well costs around $7 million to drill and complete, according to Barclays, an investment bank, the cheapest of any shale-gas play. At the same time, producers are getting twice as much gas per well now than they were in 2012.

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