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Gas Production in the U.S. at a Standstill?

Regional Production Analysis Part 2 – Ohio and West Virginia

June 18, 2015 | By Charles Nevle

In Part 1 of this series we discussed the fact that wellhead gas production rose 6.6 billion cubic feet per day (Bcf/d) in 2014, to average 80.1 Bcf/d on an annual basis. However, since the beginning of 2015 production has actually declined from its peak in December 2014. Part 1 of this series focused on the Marcellus Shale, particularly the dry portion of Northeast Pennsylvania (Pa.) which had declined by about 1 Bcf/d since the beginning of the year. In this edition of Get the Point we will focus on production in the Utica Shale, which resides in our East Central region which measured annual production growth of 1.3 Bcf/d in 2014. Since December 2014 the Utica has grown an additional 0.7 Bcf/d.  We will also dive into West Virginia production, which sits within our South Central region and saw production growth of 0.8 Bcf/d in 2014 and has since been relatively flat in 2015.

2014 Wellhead Production Growth by Region

2015 Year-to-Date Production Growth by Region

Ohio Production

Between 2005 and 2012 wellhead production in Ohio was essentially flat at about 220 MMcf/d. That all changed in 2013 when production grew by 461 MMcf/d and then by an incremental 1.4 Bcf/d in 2014. This growth was all in the far eastern portion of Ohio and resulted from the development of the Utica basin with the vast majority coming from just seven counties.

Ohio Wellhead Production by County

However, after this period of extraordinary growth and a period of weak hydrocarbon prices, prospects for the liquids rich region look less certain. After growing from less than 10 rigs in the state prior to the Utica development boom, Ohio rigs peaked at 48 in January 2015 but have since dropped 56% to 21 rigs in June. Since January, gas directed rigs have declined 32%, while oil rigs have fallen 77%. With rig counts down and deferred well completions mounting, the question arises as to what impact we may see on production in the near term and in general what the prospects for this region will be moving forward.

Ohio Rig County by County

As we discussed in Part 1 of this series, production data from states is on a time delay for when that data is released and that lag will vary by state. The latest official production data available for Ohio is from December 2014. For an understanding of production beyond December, PointLogic looks to our extensive pipeline flow data to provide insight. Ohio fits within the East Central Region which includes Michigan and Indiana in addition to Ohio, although Ohio is the only state in the region with significant production.

PointLogic estimates current production from over 75 supply and processing meter points on Ohio interstate pipelines. These points provide excellent coverage of the total production in the state and make up over 90% of our estimated regional production. Using the PointLogic Excel Add-in Tool PointLogic clients can obtain historical supply data from pipeline flow in Ohio.

PointLogic Energy Excel Add-in

Using the data obtained from the Add-in, supply related flow averaged 1.90 Bcf/d in December 2014 and has since risen to average 2.45 Bcf/d this June. This represents an increase of 29% or 0.55 Bcf/d of year-to-date sample production growth. Flow points in Monroe, Noble and Columbiana counties accounted for the vast majority of the growth since the beginning of the year. The chart below makes clear that unlike Northeast Pa. the production growth in Ohio is continuing its upward trajectory.

Ohio Supply Related Pipeline Flows by County

Ohio Producers

Nearly 80% of Ohio production growth that occurred in 2014 in the seven major producing counties were at the hands of just three producers; Chesapeake, Gulfport Energy, and Antero Resources. Together, the top three producers contributed 959 MMcf/d of production on average in 2014. The next group of 6 producers made up just shy of 200 MMcf/d of production.

Ohio Average Daily Wellhead Production 2014

Chesapeake – Chesapeake is doing more with less. In a May 6th investor presentation the producer indicates a 20% improvement in Estimated Ultimate Recovery (EUR) from their wells being drilled in the Utica by a combination of longer lateral lengths, increased stages per well and enhanced well spacing. However, the presentation also indicates Chesapeake’s intention to reduce the number of rigs operating in the formation from five currently to two, the minimum number necessary to hold acreage, by the middle of the third quarter. Accordingly, Chesapeake is forecasting 3Q2015 production in their Utica position to decline by about 20% from 1Q2015, though due to the large amount of growth seen in 2014, overall 2015 production is expected to be relatively flat to 2014.

Gulfport – While Chesapeake is active in a portfolio of plays across North America, 93% of Gulfport’s production is derived from the Utica. According to SEC filings, Gulfport’s Utica production grew from 67 MMcf/d in 2012 to 210 MMcf/d in 2014 and recent company presentations put the 1Q2015 production from Utica at 353 MMcf/d. In November, Gulfport was operating eight rigs in the Utica, but has since dropped total rigs in the region to three. Recent company guidance puts overall production growth for the company as a whole at between 2% and 13% above 1Q2015 levels. Although Gulfport makes up only about half as much production as Chesapeake in the Utica, and while both are slowing their activity from the pace seen in 2014, Gulfport appears to be looking to be a bit more aggressive for the remainder of the year in the Utica.

Antero – As of a May 2015 company presentation, Antero’s capital budget for 2015 is $1.8 billion, a 49% decrease from 2014’s $3.5 billion and is currently operating 11 rigs, 4 rigs in the Utica and 7 rigs in the Marcellus down from a total of 21 rigs as of December 31, 2014. However, Antero’s first quarter Utica production was 274 MMcfe/d compared to 191 MMcfe/d for the 4Q2014, a 44% increase. Antero plans to defer completions on 50 wells in the Marcellus until 2016 in order to realize better pricing, no such deferrals are discussed for their Utica acreage. Company guidance puts overall average production (including Marcellus and Utica) for the year essentially flat to their first quarter output.

Utica Conclusions

The drumbeat for the Utica seems pretty consistent across the major regional producers. Despite reduced drilling activity this year, first quarter production results are up significantly due to a combination of reaping the benefit of pre-curtailment drilling activity and actively increasing the efficiency of their area operations. Although drilling activity will be down this year, numerous wells that have been drilled but are waiting to be completed or waiting for pipeline infrastructure will likely be brought on line throughout the year.

Significant infrastructure projects are coming on line in the region such as REX’s East-to-West project that should both allow more production to come to market as well as aid regional pricing. In total, PointLogic’s pipeline database contains 22 projects totaling 9.5 Bcf/d of capacity with in-service dates in 2015 originating from Ohio, Pennsylvania, and West Virginia.

These factors should certainly help offset the impact of the dramatic reduction in regional rigs and help hold Utica production at very least, steady for the remainder of the year. Month to date production growth in the region via PointLogic’s flow data does not appear to have abated, so for now production is looking to do better than just hold steady for the year.

West Virginia Production

West Virginia really began to grow in 2010-2011. Production grew by 2.1 Bcf/d between 2009 and 2014 with 95% of that growth in seven counties and over 80% in just four counties. This growth has nearly all been related to development in the Marcellus Shale and is concentrated in the northwest portion of the state near its borders with Ohio and Pennsylvania.

West Virginia Production by County

Since the recent high of 36 rigs that was reached in October 2014, the rig count in West Virginia dropped to a low of 16 in February, but has since climbed back, and as of June 12th, the rig count in West Virginia is at 19 rigs- 100% gas rigs. Oil directed rigs have stood at zero since late April.

West Virginia Rig Count by County

Leveraging off of PointLogic flow data and using the same methodology that was used in the Ohio discussion, significant gains have occurred in production levels, but since December 2014 production in West Virginia appears to have stagnated.

West Virginia Related Pipeline Flows by County

Production in the region has stagnated before, most notably last summer where there was very little growth between Nov 2013 and May 2014 and then a large jump in June 2014 followed by strong month on month gains. A shortage of regional infrastructure, especially from processing plant capacity, drove the stagnation last year which certainly could occur again this year, To get a clearer picture let’s look at what the region’s largest producers are saying.

West Virginia Daily Wellhead Production 2014

WV Producers

Over 85% of the WV production growth in 2014 in the seven major producing counties was at the hands of just three producers, Antero, EQT, and Noble Energy which collectively contributed 620 MMcf/d of the 723 MMcf/d total growth in those counties last year.

Antero – As of a June 2015 company presentation, Antero is operating seven rigs in the region. While rig counts are down from 2014, as noted in the Antero discussion in the Ohio Producer overview above, what seems to be holding back Antero is lack of takeaway capacity from West Virginia. Their company presentation makes it clear that they plan to defer wells until 2016 when additional gathering pipeline will be in service as well as their 590 MMBtu/day capacity on Tennessee Gas Pipeline’s Broad Run project which Antero plans to utilize to achieve pricing at both TCO-Appalachia and Columbia Gulf- Louisiana. The Broad Run project’s expected in-service date for the initial 590 MMBtu/d is Nov 1, 2015. So, while Antero led production growth in West Virginia in 2014, they appear intent on holding back on growth until they have access to the infrastructure that allows them to achieve better realized prices for their local gas than what they receive today.

Antero Completion Deferrals

EQT – Unlike Antero, EQT appears to be intent on growing production in 2015 and not deferring well completions until more regional infrastructure is built. EQT has Marcellus production in both Pennsylvania and West Virginia. In EQT’s latest 10-Q filing they indicate anticipated volume growth of about 24% in 2015 from their holdings. Applying the 24% growth to their 2014 West Virginia production would imply an increase of about 84 MMcf/d.

Noble Energy – Noble has a fairly diversified acreage portfolio including holdings in the Denver Julesburg (DJ) Basin, Deepwater Gulf of Mexico, West Africa, and Israel and Cyprus in addition to their Marcellus position in Southwest Pennsylvania and West Virginia. Their Marcellus operations are via a 50/50 joint venture with CONSUL Energy where Noble is the operator in the wet gas areas and CONSUL is the operator in the dry gas areas. They have indicated in a recent investor presentation their intent to shift capital away from the Marcellus and towards their DJ Basin holdings. As of February, the joint venture was operating six rigs in the Marcellus while their May investor presentation indicates intent to drop this number to between three to four rigs during the second half of 2015. 

West Virginia and Overall Northeast Conclusions

Thus far, 2015 production growth across Pennsylvania, Ohio and West Virginia each tell a different story.  Pennsylvania production growth is slowing to the point where it is possible to see production declines this year. Ohio production growth is seemingly unabated, while West Virginia slides in between these two extremes with production essentially remaining flat- at least for now. While the constraint in Pennsylvania seems more driven by low regional gas prices, the constraint in West Virginia appears to be primarily takeaway capacity constraint driven.

Pennsylvania Supply Flows by Region

Ohio Supply Flows by County

West Virginia Supply Flows by County

One could contend that the price weakness in Pennsylvania is driven by take away capacity constraints and thus both regions are in the same boat. The difference is that when infrastructure constraints are lifted and additional gas flows, Northeast Pennsylvania will have to compete for markets with gas growth out of West Virginia and Ohio. Given the uplift in economics from liquids in West Virginia and Ohio (and Southwest Pa.), dry gas from Northeast Pa. will likely still be in a tough spot. So, for the remainder of the year, with all the usual weather caveats, gas production in the broad Northeast market which includes Pennsylvania, West Virginia and Ohio should remain relatively flat with gains in Ohio offsetting losses in Pennsylvania and West Virginia.

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