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US Gas Prices In Free Fall: Shale Glut Accelerates Energy Revolution

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Gregory Meyer, Financial Times

The nerves of shale investors are frayed because natural gas prices in the US are in free fall.

When Cabot Oil & Gas held an investor conference call last month, the driller was at pains to soothe concerns about the Marcellus shale, a vast rock formation undergirding the Appalachian mountains of the US northeast that contains huge gas reserves.

Nerves are frayed because natural gas prices in the region are in free fall. The decline is ominous for producers like Cabot seeking to maximise returns on the wells they drill. It also threatens to turn a gentle slide in the broader natural gas market into an avalanche, hurting commodity investors who allocate money to US gas futures.

The Marcellus field is enormous. The US Energy Information Administration last week more than doubled its reserve estimate for the region to 31.9tn cubic feet as companies use horizontal drilling and hydraulic fracturing to bust open shale rocks and liberate trapped gas. This is nearly a quarter of total US shale gas reserves.

More importantly, supply from Marcellus states such as Pennsylvania and West Virginia has been climbing even as production from other shale fields has levelled off. Gross production is up 45 per cent so far this year from the same period in 2012, according to Bentek Energy. In the Haynesville shale straddling Louisiana and Texas, production is down 21 per cent on year.

The Marcellus has “almost singlehandedly been making up for the small declines everywhere else in the country,” says Vikas Dwivedi, energy analyst at Macquarie.

In 2009, when the Marcellus started producing, US gas prices averaged about $4 per million British thermal units. They now are about $3.30. Yet companies have been enticed by the relatively low cost of drilling wells in the Marcellus and the valuable hydrocarbon liquids it also yields.

The wells there are prolific. Range Resources, a leading driller in the region, is spacing wells more densely and extending bores thousands of feet underground to increase gas recovery. The company expects to increase production 20-25 per cent a year.

“Marcellus has unbounded production potential. The only thing that’s limiting its potential is infrastructure constraints,” says Mr Dwivedi, whose bank is also the fourth biggest North American gas marketer by volume.

These infrastructure limitations – mainly inadequate pipeline and processing capacity – have bottled up some gas and cratered prices in the region. Last Friday, gas at a Pennsylvania trading hub called TGP Zone 4-Marcellus sold for as little as $1 per mBtu – a discount of more than $2 to benchmark prices.

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