What’s the Break-Even Price of Marcellus NatGas for Drillers?

Another stellar column from Seeking Alpha blogger and energy analyst Richard Zeits—this one delving into the thorny topic of, “At what natural gas commodity price is it profitable for a driller to continue drilling?” In particular, at what price in the Marcellus Shale.

His column begins this way:

Among North America’s natural gas fields, the Marcellus is broadly recognized as one of the lowest-cost sources of supply. However, when it comes to estimating specific natural gas price levels – in Henry Hub terms – that would be required to support sustained drilling activity in the field, there appears to be a fair amount of divergence in opinion among investors and analysts. Estimates vary widely, from as low as $2.50/MMBtu to over $5/MMBtu.

In 2012, despite the deeply depressed natural gas price environment, the trajectory of production growth from the field showed no signs of slowdown and in 2013, the Marcellus will likely make another massive step up in terms of supply volumes.

The question regarding the field’s drilling economics appears increasingly important as the Marcellus may prove to be not only a "baseload" source of natural gas but also a marginal source of supply and as such would play a role in setting the "equilibrium" price for natural gas nationwide. Indeed, the Marcellus is enormous, both in terms of its geographic extent and gas resource it holds, and has proven so far very capable of overcoming infrastructure constraints. The Marcellus is also a very non-homogeneous field, both in terms of well productivity and gas/liquids mix, resulting in great variability of returns from area to area.

What do operators themselves think about the Marcellus economics? In fact, many of them readily share their outlooks. In this note, I will briefly review estimates provided by several Marcellus operators for dry gas areas and will try to derive implications for natural gas prices. In a follow-up note, I will focus on wet gas economics.*

Click the link below to read the rest. It’s interesting, informative, and if you have an interest in the economics of drilling, important reading for you. There’s lots of charts and graphs—and numbers. He gets specific.

*Seeking Alpha/Richard Zeits (Jan 31, 2013) – Marcellus Shale: What Do Gas Producers Say About The Play’s Economics?