Production

Marketed natural gas production increased for the fifth consecutive year in 2010, as producers continued to realize gains from improved technology, particularly in horizontal drilling in shale formations.figure data Additionally, high liquids prices drew producers to “wet” natural gas plays. Production gains in the lower-48 States more than offset declines in the GOM (Figure 1) where production continued an overall trend of long-term declines, falling from 6.7 Bcf per day to 6.2 Bcf per day.¹

Onshore marketed production grew from 51.5 Bcf per day in 2009 to 54.6 bcf per day in 2010, even as Henry Hub prices remained relatively low. Prices increased about 11 percent from the previous year's abnormally low levels, but were about 50 percent lower than the abnormally high levels of 2008 ($8.86 per MMBtu). Compared to the 5-year (2005 – 2009) average price of $7.07 per MMBtu, 2010 prices were about 38 percent lower.

Drilling activity rose in 2010

The natural gas rig count rose over the year, from 804 at the beginning of 2010 to 929 at the end of the year.² Horizontal natural gas-directed rigs grew about 36 percent in 2010, from 465 to 633. Directional rigs remained flat, and vertical rigs fell by 22 percent. The shift toward horizontal natural gas drilling rigs largely reflected the ongoing shift in drilling toward shale formations. The increased use of new drilling technologies, hydraulic fracturing as well as horizontal drilling, means that the overall number of natural gas rigs has taken on new meaning.  For example, shale wells often have higher initial production rates; and horizontal rigs have a greater number of wells per rig (although this is somewhat offset by a steeper decline curve than vertical rigs).³ As a result, even as rigs are far below levels reached in 2008, production has continued to grow.

High Natural Gas Liquids Prices Drove Production Growth

NGLs are the heavier hydrocarbons that are extracted when natural gas is processed, and can be fractionated into ethane, normal butane, iso-butane, and propane. They are important inputs to many industrial activities. In 2010, production of NGLs was at its highest level on record, at more than 2 million barrels per day.

Portions of both the Eagle Ford Shale and the Marcellus Shale are rich in NGLs. Natural gas-directed rig growth was aggressive in the Eagle Ford in 2010, as the number of rigs nearly doubled over the year, increasing to more than 80 operating units.⁴ The rapid growth in the Eagle Ford shale in recent years has highlighted the importance of NGLs in driving production strength. Although parts of the Marcellus Shale are liquids rich, and saw growth in 2010, the growth may have been somewhat limited due to lack of processing capacity and local markets for liquids, particularly ethane. Several proposed projects in the Marcellus Shale might address the excess ethane. For example, El Paso Corporation proposed the Marcellus Ethane Pipeline System, which would transport up to 60,000 barrels per day of ethane from fractionation plants to interconnections with third-party pipeline systems in Louisiana. The project has a proposed in-service date of April 1, 2013.⁵

The rise in liquids production also stretched existing processing capacity to its limit in other areas of the country. Oneok Partners, for example, announced it would build 100,000 barrels per day of fractionation capacity by 2012 to support NGL production from the Bakken Shale in North Dakota.⁶ Enterprise and Targa Resource Partners also announced major NGL capacity additions near the Eagle Ford.

Other Forces Put Both Positive and Negative Pressure on Production Growth

Despite strong year-over-year production growth, producers did face some challenges in 2010. Offshore, following the Macondo well blowout in April 2010, a temporary moratorium affected some GOM drilling. Onshore, in the Marcellus Shale in 2010, concerns about drilling safety led regulators to impose fines and penalties on a number of companies, including Cabot Oil & Gas and EOG Resources. Pennsylvania's Department of Environmental Protection fined Cabot for groundwater contamination and fined and ordered EOG to suspend drilling following a well blowout. While some lawmakers have proposed drilling bans and other regulations, production in the much of the Marcellus—especially Pennsylvania—has continued to grow.

Another obstacle to natural gas production in 2010 was weather. In general, onshore lower-48 production is less susceptible to traditional weather threats, such as the hurricanes and tropical storms experienced in the GOM and coastal areas of Texas and Louisiana. However, onshore production is not immune to cold weather and freeze-offs. In January of 2010, freeze-offs reduced national natural gas dry production by 5 percent.

Unlike regulatory and environmental challenges, joint ventures and foreign investment probably helped to boost production in 2010. Foreign companies partnered with U.S. producers to gain expertise in development of shale natural gas. For example, India’s Reliance Infrastructure entered into three large joint ventures to drill in shale plays, including a $1.7 billion deal with Atlas Resources in the Marcellus Shale. Seven joint venture deals were reached in the United States in 2010 for a total of $9.2 billion, and outright sales of shale lease ownership also took place.

Table 2. Joint ventures in U.S. shale plays in 2010

Foreign Partner	Domestic Partner	Shale Play	Deal Amount ($ billions)
Reliance	Pioneer	Eagle Ford	1.3
Reliance	Atlas	Marcellus	1.7
Reliance	Carrizo	Marcellus	0.4
Total	Chesapeake	Barnett	2.3
CNOOC	Chesapeake	Eagle Ford	1.1
British Gas	EXCO	Marcellus	1.0
Mitsui	Anadarko	Marcellus	1.4
Total			9.2

Source: U.S. Energy Information Administration, Natural Gas Monthly

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Footnotes