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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (
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  • The Real Marcellus Shale Gas Production  19 comments
    Oct 2, 2012 1:27 PM | about stocks: ACIZQ, APA, APC, BTUUQ, CHK, COG, EOGQ, KOL, SD, SWN, UNG, WPX

    Investors bullish in coal (NYSEARCA:KOL) and natural gas (NYSEARCA:UNG) expect to see significant drop in natural gas (or NG) production soon. They are frustrated at the lack of production decline in the latest EIA data. We know that low NG prices forced producers to reduce rigs drilling for gas. They moved the rigs to drill wells rich in oil/liquid instead. Why the NG production has not dropped?

    The Marcellus Changed Everything

    We need to look at Marcellus Shale closely to find the real decline of NG production in the US. As RBN Energy discussed, there was rupture in the space-time continuum:

    As the chart shows, NG production from Marcellus was still growing. But production from everything else was declining. The growth in Marcellus canceled out the decline from elsewhere, leaving only moderate decline of overall US production.

    People speculated that as producers move to oil/liquid rich plays, the increased by-product gas production from the oily wells can cancel out the drop in dry gas production. That is NOT the case. Most oil/liquid rich plays, like Eagle Ford or Bakken, are lumped into "everything-else", which is in decline. The growth in Marcellus, a dry gas play, was what stopped US NG production from falling.

    Here is an EIA chart of shale gas productions from different areas:

    As shown, the rapid growth leveled off by Dec. 2011. But Marcellus production continued to grow, leading to a flat total production.

    Marcellus Growth Already Leveled Off

    Marcellus is mostly in Pennsylvania. Most of its production is from PA. EIA noted fewer daily well starts in PA recently:

    EIA commented:

    On average, 5 horizontal natural gas wells were started each day in 2011. In 2012, the new horizontal well count generally remained above 4 per day through April, but has fallen steadily thereafter. In July 2012, operators began drilling, on average, only 2.5 horizontal natural gas wells each day.

    Here is the actual data of new horizontal well starts in PA:

    (click to enlarge)

    As fewer wells are started, fewer wells will soon be completed and put into production. So the production should level off soon. The EIA data already show the trend. PA production grew rapidly from January to April. But by August, it was almost flat from July level:

    (click to enlarge)

    The red line is my calculation based on raw PA gas production data. The chart shows that daily production grew only 1.3% higher from July to August. The growth has leveled off. Is it going to drop soon?

    Fewer Well Starts Leads to Production Drop Soon

    I explained in the past that shale gas wells decline fast. Producers must keep adding new wells to replace lost productions. When they slow down adding new wells, total production will start to drop.

    But there is a time delay from reduction of drillings to reduction of new well completions. Last year it took about three month from well spud to completion. Today there is a growing backlog of nearly 1000 Marcellus wells already drill but not completed yet. The time from spud to production has grown to five or six month.

    Some analysts worried about the large backlog of Marcellus wells waiting for completion. They believe that even if producers stop all drillings now, when new pipelines are completed, a flush of new gas production will be put online, flooding the market with a supply glut.

    I believe the opposite is happening. The reason there is a growing backlog is that producers do NOT want to rush wells into production in a low price environment. Most completion crews are working to bring oil/liquid rich wells online first, leaving dry gas wells behind.

    So to the bulls, the growing backlog of wells is a good thing, not a bad thing. As long as the producers do not rush to complete these wells all at once, there will be no flush of new supply. The EIA data already shows that the Marcellus production growth is leveling off. The question is will it turn into a decline soon? We do not know yet.

    My take is that even the new pipelines will come online soon, new wells can be connected all at once. Completion crews still in the area have to work on the wells one at a time. I believe there are not enough completion crews in Marcellus. The data shows they are only starting 2.5 new wells per day now. If most drilling teams are working some where else, most of the completion crews must be at some where else, too. If they do not have resource to bring wells online fast enough to fight the declines, production will fall soon.

    Marcellus Gas Production Projected Based on Well Starts

    Knowing number of new well starts each month, I can estimate how many wells are completed in each month. I can then calculate the monthly production rates, based on reasonable decline rates of existing wells and reasonable IPs (Initial Production Rate) per well. My calculation is matched against production data from PA DEP. As they do match, I must have used the correct decline rates and IPs.

    (click to enlarge)

    The above shows my projected PA daily gas production rate. The thick smooth long lines are the total production rates in BCF/day. The zigzag lines tell how steep the wells decline, and how new wells in each month brought the total production up against the declines.

    The red up arrows stand for new production each month. An arrow for 100 new wells per month is put on the chart for reference. You can see how steep the production would have fallen had there been no new well additions.

    PA Shale Well Production For Six Month Periods (BCFs)
    Six Month Production H1-2010 H2-2010 H1-2011 H2-2011 H1-2012
    PA DEP Data 138 272 435 631 895
    My Calculation 140 276 436 630 895
    Discrepancy +1.4% +1.5% +0.2% -0.2% +0.0%
    Daily Decline -0.8% -0.7% -0.5% -0.4% -0.3%
    IP (MCF/well) 2.5 3.0 3.5 3.6 4.3

    My calculation matched the six month production data from PA DEP. I assumed these reasonable parameters:

    • Combined daily decline rate of existing wells went from -0.8% in H1-2010 and gradually trended down to -0.3% in H1-2012. Early combined decline rate was higher because most wells were new. As the wells aged, the combined decline rate slowed down.
    • Per well IP remains at roughly 3-4 MCF/day, starting at a low 2.5 MCF/day and increased to 4.3MCF/day recently. This was due to producers moving to the more productive sweet spots.

    What do these numbers tell us?

    Discussion and Investment Implications

    NG producers must work hard to maintain production as shale wells decline fast. Even a moderate slowing in adding new wells will result in falling production.

    Currently existing Marcellus wells are losing 0.3% of production daily, or losing 67% annually. At 5.85 BCF/day production rate, the decline is 16.5 MCF/day each day. Average well IP is 4.3 MCF/day. So to counter the decline, about four new wells per day are needed.

    According to the data, new well starts in July fell to 2.5/day. That is far below the 4/day threshold to maintain production. Since production was flat in August, the well completion rate must have dropped to 4/day in July as well. Due to the large backlog of wells waiting for completion, depending on how many completion crews are working to bring these wells online, Marcellus production may or may not start to fall rapidly.

    But since productions from else where are already falling, a mere slow down in Marcellus growth means a falling total NG supply in the US. The latest EIA data shows that the gross withdrawal dropped to 79.243 BCF/day in July from 80.720 BCF/day in June, or dropped by 1.83%. That supports my notion that US NG production is falling.

    Using the smart method I discovered, the EUR (Estimated Ultimate Recovery) per well can be estimated by dividing IP by the decline rate D of all existing wells in the play:

    EUR = IP/D = 4.3MCF / 0.3% = 1.43 BCF/well

    My EUR is far lower than what Chesapeake Energy (NYSE:CHK) projected:

    (click to enlarge)

    I believe my method is logically correct. My EUR, 1.43 BCF, is consistent with actual Marcellus performance so far. There were 2312 wells drilled and 1530 BCF cumulative gas production in PA Marcellus by the end of 2011. That averaged only 0.66 BCF/well. My EUR is also consistent with EUR estimate based on recovery factor.

    Invest in Coal, Not NG

    As Marcellus production starts to drop soon, the US NG supply will fall off a cliff, natural gas prices will go much higher, allowing coal prices to go higher as well. But people should not be lured into the NG sector just because natural gas prices are higher. They should invest in the coal-mining sector, instead.

    The US investment community made the biggest energy investment mistake in history, by abandoning coal and rushing to the hype of cheap and abundant shale gas in the US. Judged by market capitals, investors put 75 times more money into the NG sector than the coal sector. In reality both sectors produce the same amount of energy for the US economy. Both are equally important.

    The myth that "cheap and abundant natural gas is killing coal" is so widely accepted that even people around me who did not trade stocks have heard about it and they believed it. I had a hard time convincing them that the myth is false.

    The shale gas is neither cheap nor abundant. We only need to look at two things: It's been nearly two decades since the NG ventured into shale plays. The industry has accumulated 23 TCF of shale gas production. But they have also accumulated $500B of debts related to shale. That is a debt load of nearly $22/mmBtu of gas produced. Had gas prices been $2/mmBtu or $3/mmBtu higher, the industry would have taken home $46B or $69B more revenue. It would not have made a difference in the industry's $500B collective debts.

    What would you think if the US coal sector had accumulated half a trillion dollars of debts after producing coal for two decades? Patriot Coal went bankrupt for a mere $600M of debts, not $600B. I foresee a looming debt crisis of the NG industry. The debts must be resolved in one of two ways. Either NG prices go to ridiculous high levels and stay there sustainable, so the industry makes enough profits to pay off the debts before the gas runs out. If that does not happen, then many NG producers and banks in the shale business will go belly up.

    I continue to advise people to invest in the coal sector, not the NG sector. The discussions here are relevant to the following issues:

    • NG players: Cabot Oil & Gas (NYSE:COG)
    • Chesapeake Energy [CHK]
    • Southwestern Energy (NYSE:SWN)
    • SandRidge Energy (NYSE:SD)
    • Anadarko Petroleum Corp. (NYSE:APC)
    • Apache Corp. (NYSE:APA)
    • EOG Resources (NYSE:EOG)
    • WPX Energy Inc.(NYSE:WPX)
    • Coal players: Arch Coal Inc. (ACI)
    • Alpha Natural Resources (ANR)
    • James River Coal (JRCC)
    • Peabody Energy (BTU)
    • ETFs: United States Natural Gas [UNG]
    • Market Vector Coal ETF [KOL]

    Disclosure: I am long ANR, ACI, JRCC, BTU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (19)
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  • Steve Bass
    , contributor
    Comments (416) | Send Message
    Always enjoy reading your articles and posts, Mark, and appreciate your research and tenacity in the face of so many naysayers. Hope you will keep sharing your research.


    However, it would be nice if at least one industry publication or respected analysts came out with numbers close to yours. Have seen a lot of studies putting the full cost at $6 - $8 per MCF...but nothing close to your figures.


    When you advise to invest in coal over ng, you are obviously suggesting investing in coal COMPANIES over ng COMPANIES. I guess because you assume your readers don't have the wherewithal to open an acct at somewhere like Interactive Brokers and even buy a micro NG contract.


    I think it is much more direct to invest in the long-term price of natgas, and have invested in 2018 and 2019 contracts. If you take whatever costs you believe, and add, say 4% to it per year to account for the devaluation of the dollar against food and energy, you get some pretty high numbers.


    I prefer the commodity over the company (regardless of the product) because stagflation will likely hurt stock mkt valuations while food & energy prices will likely outperform.


    As an 'environmentalist' (prefer to think of myself as someone that cares about future generations), I can't bring myself to invest in coal anymore than I could invest in tobacco.


    You may make money, but the problems with coal are real - there is no such thing as 'clean coal.' Yes, China & India may continue to build plants like mad-hatters, but as ocean and fresh water acidification will continue higher, more mercury in fish, childhood asthma, Global Weirding...the U.S., Europe and Japan may just get a bit more serious about the issue and make it an issue in trade agreements. Otherwise, we are all in deep ____.


    Even if you were agnostic on the enviro issue, why take the chance?
    2 Oct 2012, 02:47 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Steve:
    Thanks for your comment. I intended to post this as a formal article. But SA editors declined it. So it is posted here as my instablog post.


    As for direct commodity investment I believe if you don't hold the stuff, you don't have it. Investing in futures contracts get you just paper. So it will not work. Read my old article to understand why:


    Yes different studies put natural gas cost at $$2, $3, $5, $8 per mmBtu or other numbers. But the fact of the matter is the industry managed to accumulate half a trillion dollars in debts and they have to continue to spend money to drill new wells just to maintain production. You need to wonder how they manage to accumulate so much debts and managed to produce only 23 TCF of shale gas so far.


    For some industry huge debts for an up-front cost is understandable. Coca Cola may spend billions building soda factories, and then they only need to pay maintenance cost. But the NG industry is different, they have to keep spending money, as a new well lost most of its production already in 2 or 3 years. You have to wonder how they can keep spending money to drill wells and at the same time manage to pay off that half trillion dollar debts.


    Coal is dirty, all modern science and technology is dirty. Detergence is dirty: It gives you cleanness for a a little while, but forever pollutes the water rivers and the oceans. But we have to live with these inconvenient truth, or craw back to caves.
    2 Oct 2012, 02:57 PM Reply Like
  • dieuwer
    , contributor
    Comments (2940) | Send Message
    Mark, when do you think banks will pull the plug on natural gas producers? They cannot keep adding debt to the $500B outstanding with natural gas prices not high enough to pay off the debt.
    2 Oct 2012, 03:44 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » dieuwer:


    I do not know when the banks will pull the plug. They are un-willing to pull the plug because that will hurt themselves just as badly. They want to extend the illusion as much as possible.


    Investors, on the other hand, should start to wake up sooner. Investors have a vested interest in learning the truth. They are not dumb, they do try to find out the truth.


    Half a trillion dollars of total debts related to shale gas development is a scary number. When banks tighten up credit, the industry is probably going to pay 7.5% or higher interest rate on that debt. Let's say 7.5%, that's $37.5B just on interest. The annual shale gas production is less than 10 TCF a year. So you are talking about having to make $3.75/mmBtu profit from the gas just to pay the interest alone.
    2 Oct 2012, 03:57 PM Reply Like
  • dieuwer
    , contributor
    Comments (2940) | Send Message
    You cannot sustain a business if all your income is devoted to paying interest.
    2 Oct 2012, 04:03 PM Reply Like
  • pete123
    , contributor
    Comments (877) | Send Message
    This is a good post. The big-picture look at the NG vs coal industries is eye-opening, and easier to understand too. Would make a great article by itself, seperate from the Marcellus number crunching.
    6 Oct 2012, 10:00 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Pete123:


    Thank you. I have made several attempt of revision to try to get this published as a formal SA article, but they turned it down. So I have to post it here as an instablog post.


    They said that I made a claim that the data did not support. I claimed so:


    As fewer wells are started, fewer wells will soon be completed and put into production. So the production should level off soon. The EIA data already show the trend. PA production grew rapidly from January to April. But by August, it was almost flat from July level:


    The chart right below it clearly shows that the Marcellus production was growing early in 2012, but leveled off by August. Isn't that data support for my claim? Isn't that suggestive that it could turn into a drop ithe next few month? Is that is not strong data support, what is data support then?


    They call it that I made claims un-supported by data? Give me a break! I saw plenty of other SA articles with pure illogical wild speculations with zero data support. Those trash got published easily. But my carefully prepared article got rejected again and again after several revisions. I wanted to write quality articles. It's really frustrating I really don't know exactly what the editors want.
    6 Oct 2012, 10:47 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Here is a quick tally of total debts of some of the NG producers:


    CHK 26,695,000
    APC 34,242,000
    DVN 20,649,000
    ECA 17,594,000
    COP 96,347,000
    SWN 4,402,402
    WPX 4,644,000
    EOG 12,197,893
    OXY 22,875,000
    APA 23,058,000
    UPL 3,386,311
    QEP 4,125,100
    COG 2,277,838
    EQT 5,152,855
    XCO 2,230,303
    RRC 3,884,856
    NFX 4,995,500
    NBL 9,531,000
    PXD 6,035,367
    MRO 14,219,000
    XEC 2,505,987
    SM 2,354,674
    PXP 6,894,819
    KWK 2,782,254
    FST 2,328,870
    LINE 5,549,674
    EGN 2,958,948
    SD 4,593,598
    WTI 1,297,925
    UNT 1,328,978
    MDU 3,780,558
    SGY 1,497,922
    HES 21,584,000
    Total 378,000,632


    The total comes to $378B. Note that I have excluded the big oil companies: XOM, CVX, DVN, COP, BP. If these big oil oil companies factor in their own respective portion of debts related to natural gas, the entire NG sector owed HALF A TRILLION DOLLARS of debts since they ventured into shale gas development.
    6 Oct 2012, 10:56 AM Reply Like
  • Steve Bass
    , contributor
    Comments (416) | Send Message


    As the resident SeekingAlpha natgas bull, how about an article on the latest USGS report on shale natgas EURs?


    Their numbers back up your calcs and that's what SA obviously wants to see when you come up with original models. Looks like some of the data is older unfortunately, but the USGS assessed Marcellus in 2011 and came up with 1.2 BCF - which is about 1/5th what Arthur Berman indicates the E&Ps were claiming...and that's with them drilling the prime properties first.


    As I mention on this post on the BRY msg board, the USGS is making even Berman's numbers look optimistic.

    6 Oct 2012, 01:03 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Steve:


    I am a natural gas bull, I am just not a bull in the NG producers. I believe natural gas should be sold at much higher prices, close to the true costs. Natural gas needs to be used where it must be used. It should not be considered as a cheap energy source.


    Thanks for the link. I find it very interesting. The USGS is a geology organization. They are interested in geology first and foremost. So they tend to first look at how much really exists underground, and then try to decide how much of the underground gas could realistically be extracted. I think that is the right approach. I have discussed it here:



    I will follow up more on that USGS article you gave me:


    Care to say something about the USGS report, Craig Cooper?
    6 Oct 2012, 01:58 PM Reply Like
  • zebra114
    , contributor
    Comments (247) | Send Message
    It doesn't surprise me that SA did not publish your article. It goes against the grain of what the big gas companies are trying to tell us all. Keep writing and hopefully some day people will "get it", and you can rest with the knowledge that you tried to warn them.
    8 Oct 2012, 09:20 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Zebra:


    The SA editors have now declined FOUR of my carefully written articles in a row. For the first two at least they gave me a chance to revise and then decline. The last two, they outright declined them without giving me any chance to revise.


    Clearly I speak of some truth that is very irritating to some ones. Especially the last two articles.
    8 Oct 2012, 09:40 AM Reply Like
  • dnpvd51
    , contributor
    Comments (2492) | Send Message
    Thank you Mark for your good work here.


    I also think QE to infinity and all the rest has muc to do with the over investment in NG.
    8 Oct 2012, 02:22 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Well. I am about to have it! My time is precious.


    After SA Editors declined four carefully researched articles of mine in a row, I thought I will submit one which is brief (only 600+ words) and concise for a change. Yet they outright declined it, without saying what is the problem.


    SA just don't want in-depth and carefully researched articles do they? You just don't want to discuss inconvenient truth that certain vested interest groups hate to see here? I know the NG industry has trillions of dollar at stake.


    I see plenty of totally nonsense SA articles on SA site, articles of people wildly speculate on things with no logic and no research, and goes against basic facts. I am not the only one saying so. Those people probably spent ten minutes write up some nonsense and you pay them for writing garbages. I wanted to bring something positive and I want to present things backed up by facts and careful researches. But obvious they don't want them. I think my readers really appreciate my articles.


    I sensed that I am about to be kicked out of the SA community for good. If that is the case, fine. It is their site, not mine. They control everything. I can not do anything about it. I hope at least they tell me straight that is what they wanted, so that I do not waste any more of my own time sharing my thought here.


    Mark Anthony
    8 Oct 2012, 02:29 PM Reply Like
  • dieuwer
    , contributor
    Comments (2940) | Send Message
    I had the same problem with SA. Eventually, I submitted my article to Barron's and it was published right away!
    15 Oct 2012, 09:22 AM Reply Like
  • scoot157
    , contributor
    Comments (14) | Send Message
    I appreciate all of your work. I started following you several months ago as I have been investing in oil stocks for a long time and wanted to find out more about the coal producers which I agree are a great investment now. In fact, I am already positive on my positions in ACI and ANR.


    My expertise is in the oil/natgas arena since that is where I have been investing heavily for these past years. Simply said, you have done a great job exposing the risks in using company supplied EUR's to determine natgas supply. I have been waiting to see the rollover in gas production and truly believe we are on the cusp of seeing a substantial drop off. The pending increase in offtake pipeline capacity out of the Marcellus may flatten the rollover curve somewhat, but even if producers completely fill the pending 3.4 bcf/d pipeline, I can't see how it will offset the depletion going on in the rest of the USA.


    Thanks again for your writings. Even if Seeking Alpha declines your new articles, you should keep posting them as instablogs.
    15 Oct 2012, 04:56 PM Reply Like
  • Lech Kowalski
    , contributor
    Comments (2) | Send Message
    I have enjoyed reading your blog. But curious because there is conflicting information. To date how may non conventional gas wells have been drilled in Pennsylvania? And how many are actually producing? Based on how many have been drilled VS how many are producing can you predict number of wells that will be actually producing by 2020 or more? Can you estimate how much may be sold as "export" (out of Pennsylvania and or out of USA) once the pipelines etc are in place? Thank you.
    15 Nov 2012, 03:02 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Lech:


    You can get tons of un-conventional well information from the PA DEP oil and gas report web page:



    Check out the SPUD report. Since 1/1/2007 till today, there are 6000+ un-conventional wells spudded (started drilling) in PA Marcellus. But surprisingly, there are only 2000+ producing wells that reported any production at all. I am really surprised by the huge number of wells drilled but unable to produce anything. I picked up a few of such wells, looked them up using Google Earth by their coordinates, and verified that those sites have indeed been drilled.


    There are also a lot of wells that reported SOME gas production. So those are real wells with productions. But the reported amount of gas produced are laughingly small.


    That's a lot of money wasted without producing anything. That's a huge cost to the shale gas industry. That's something they do not talk about in investor conferences.
    15 Nov 2012, 03:11 PM Reply Like
  • Lech Kowalski
    , contributor
    Comments (2) | Send Message
    Thanks for your reply. The question then is why is there a natural gas glut in USA. These wells must be producing something. But more to another point you make. The shale gas industry is generating construction work for the sake of that work. That work generates need for capitol and makes it look like something is going on but in fact at some point there will be no pay off and the money will stop and then what. The shale gas industry will massively fail.
    22 Nov 2012, 08:33 AM Reply Like
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