Here’s Why Marcellus Shale Play Is So Important For Chesapeake

The Marcellus shale is the largest natural gas producing region in the United States, accounting for close to one-fifth of the country’s total gas production. The shale is also emerging as one of the most economical gas plays, given the high production rates of wells in addition to improving drilling efficiencies being brought about by the adoption of technologies such as pad drilling. In this note, we take a look at  Chesapeake Energy’s (NYSE:CHK) operations in the Marcellus shale as well as some of the broader trends driving production growth in the region.

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Marcellus Is The Largest Shale Gas Play In North America

The Marcellus shale, which lies beneath the states of  Ohio, West Virginia, Pennsylvania and New York, is estimated to hold about 141 trillion cubic feet of technically recoverable natural gas reserves, according to data from the U.S. Energy Information Administration. The play’s proximity to high-demand markets on the East Coast makes it attractive to gas producers, since it enables lower transportation costs. Production from the Marcellus has been soaring, growing from less than 2 billion cubic feet per day (bcf/d) in 2007 to about 16 bcf/d currently, and production could rise to as much as 20 bcf/d by 2020. ^[1]

• Firstly, producers have been focusing on the most productive “sweet-spots” of the play, and performance has been solid for the most part. Besides strong initial production rates, operators have been seeing relatively low rates of decline. ((Marcellus Shale Region Continues Production Growth, EIA, August 2014))
• Additionally, efficiency improvements have also been driving production growth, as operators have been able to drill deeper wells in less time, at a lower cost. Although the number of drilling rigs in the area has remained relatively flat in recent months, production has continued to grow as more operators have been employing technologies such as pad drilling, which helps to drill groups of wells more efficiently while cutting down the average drilling cycle time.
• Thirdly, infrastructure upgrades, such as new pipelines and compression stations have improved takeaway capacity from gas fields in West Virginia and Pennsylvania portions of the shale, aiding production growth. More pipelines expansion projects are currently underway,  and could potentially add at least 3.5 billion cubic feet per day (Bcf/d) of additional takeaway capacity to New York, New Jersey and the Mid-Atlantic markets. ((Marcellus natural gas pipeline projects to primarily benefit New York and New Jersey, U.S. EIA, October 2013))

High Returns

The Marcellus is Chesapeake’s single largest hydrocarbon play, contributing around 187,000 million barrels of oil equivalent (mmboe) of the company’s total production (oil and gas) during Q2 2014. ^[2] In comparison, the Barnett and Eagle ford shales contributed about 62 and 83 mmboe, respectively. ^[2]  Chesapeake has seen its net production from the play grow from 15.1 mmboe in Q1 2014 to 18.7 mmboe in Q2 2014, which equates to a CAGR of about 24%. ^[2] The play has been a key driver of the company’s drilling efficiency improvements as well. About 78% of the company’s drilling operations were carried out using multi-well pad drilling in 2013 and the company expects this number to rise to around 98% this year. The Marcellus is one of the company’s most lucrative natural gas plays. For instance, the company is targeting a rate of return of over 110% on its wells, assuming that gas prices are around $4 per mcf, with an initial investment of around $7 million per well. This potentially means that the play could remain viable for Chesapeake, even if gas prices were to fall to near $3 levels.

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1. Marcellus drilling productivity report, U.S. EIA, September 2014 [↩]
2. Chesapeake 10-Q, SEC [↩] [↩] [↩]