The Marcellus shale gas play, a Devonian-age formation present in several Northeastern states in the US, could contain as much as 490 Tcf of unconventional recoverable resources, according to Hart Energy Upstream Research. This estimate makes the established resource play the second largest natural gas field after South Pars/North Dome in the Middle East, which has recoverable reserves potential of 1,235 Tcf. Given impressive well results to date, the payoff from the Marcellus is expected to be enormous.

The Marcellus arguably has the best economics of any play, slower decline rates, and growing estimated ultimate recoveries, according to operators with a vested interest in the play, including Range Resources Corp., Cabot Oil & Gas Corp., Ultra Petroleum Corp., Rex Energy Corp., and Consol Energy Inc. And, amid the current unconventional liquids rush and in a lower gas-pricing climate, Marcellus shale gas remains a profitable commodity, fetching a premium price tag in today's market. With drilling activity on the rise targeting both dry gas and high-Btu gas liquids – particularly low-cost feedstocks such as ethane and propane – the Marcellus has awakened.

The '800 lb gorilla'

Credited with discovering the play in 2004, Marcellus pioneer Range Resources Corp. owns the largest number of leases in what it considers to be the play's fairway in southwestern Pennsylvania, many of which were acquired in 2007 and 2008. The company has more than 1 million net acres in the Marcellus shale. "This is the company's 800-lb gorilla," said Mark Whitley, senior vice president for Range's Northern Appalachia & Southwest divisions. "We have about 90% of our capital tied up in the play."

As the Marcellus has evolved into the behemoth it is today, Range's focus has not been on drilling the longest laterals in the play but rather on holding and capitalizing on its premier acreage position, according to Whitley. After an initial vertical test in 2004 that jumpstarted the prolific play, the company adopted horizontal drilling technology combined with slickwater fracing to complete as many as 200 wells per year. Range also drills moderate lateral lengths averaging 2,500 ft to 3,000 ft with eight to 10 frac stages per well, he said. This compares to other recent Marcellus producers that tout higher initial rates from wells drilled with 9,000-ft laterals and completed with more than 20 frac stages.

According to Whitley, Range's Marcellus strategy is simple: to drill a large number of wells (but with fewer wells per pad) with moderate laterals and in short time to cut back on expenditures ahead of lease expirations. This strategy also mitigates downhole risks such as tool failure. Range is on track to drill up to 300 wells a year targeting the Marcellus in the "not-too-distant future," Whitley said.

Quantity remains key in a quality play. According to recent studies, the Marcellus boasts the highest rate of return (ROR) of any shale play in the country. "The ROR is outstanding," Whitley said, "particularly in southwestern Pennsylvania, which contains wet gas that includes not just methane but (profitable) natural gas liquids."

In the current gas pricing environment, at US $4/Mcf Range's wells have close to an 80% ROR, he said, and better still, 99% at $5 gas. With figures this impressive, Range, which has more than 25 years of experience drilling in Appalachia, plans to remain firmly rooted in the Marcellus shale play.

Marcellus monetization

As its proven production potential beckons, early Marcellus entry costs have surged from a low $100/acre just a few years ago to more than $7,000/acre today. Now, entry via joint venture is averaging more than $14,000/acre, according to the Hart Energy July 2011 Marcellus playbook. Recent deal flow demonstrates the giant gas shale's increasing appeal. In 2010, there were five deals totaling $5.4 billion involving the Marcellus shale. Steve Haffner, a PwC energy partner based in Pittsburgh, said his firm expects continued interest and substantial investment in the Marcellus region despite depressed gas prices. For many operators, the bottom line is that the Marcellus shale continues to generate strong returns below $5/MMBtu.

Another early entrant, Statoil acquired a 32.5% interest in Chesapeake Energy Corp.'s 1.8 million net acres in the Marcellus region of northeastern Appalachia in a 2008 deal. The Norwegian company bought the right to an additional 32.5% participation in any additional leases acquired by Chesapeake, which is the most active driller in the play. The initial joint venture consisted of more than 32,000 leases in Pennsylvania, West Virginia, New York, and Ohio, providing recoverable equity resources of up to 3 Bboe, according to Statoil estimates. The partners believe the development program could support drilling 13,500 to 17,000 horizontal wells over the next 20 years.

In March 2010 Statoil strengthened its alliance with Chesapeake in the Marcellus shale by adding 59,000 net acres to its portfolio. And the company plans to continue investing according to vice president for the Marcellus asset, Andy Winkle. "We were an early mover into the Marcellus, and we will continue to build a long-term position in what we expect will become a legacy asset and reach our goal of 50,000 Boe/d production by 2012," he said. Today, Statoil has more than 660,000 net acres in the Marcellus.

Japan's Sumitomo Corp. also moved into the Marcellus in August 2010 via a $140.4 million joint venture between its subsidiary Summit Discovery Resources II LLC and Rex Energy Corp.

2011 has proven to be a deal-wheeling year in Marcellus M&A as well, with global integrated energy company Chevron breaking into the play through the $4.3 billion purchase of Atlas Energy. In this blockbuster deal, Chevron claimed ownership of more than 486,000 acres, 850 Bcf of proved gas reserves, and 80 MMcf of gas production in the Marcellus. The company subsequently increased its stakes in the prolific shale basin in May 2011 by acquiring 228,000 net leasehold acres from privately held Chief Oil & Gas and investment firm Tug Hill Inc. for an undisclosed price.

At press time, Seneca Resources (National Fuel Co.) was wrapping up a call for bids to joint venture 750,000 acres in the Marcellus shale. B&B Oil and Gas Production Co. also recently announced it had retained EnergyNet to sell a Marcellus package comprising 4,761 acres (4,350 held-by-production) and production of 1 MMcf/d of gas in Pennsylvania in a negotiated sale.

Environmental, economic impacts

Although the play's economics look good, environmental groups continue to spook the masses with tales of groundwater contamination said to derive from fluids used during the hydraulic fracturing process and flowback operations. Citing the need to investigate the drilling technique's environmental impact, New York State instituted a moratorium on high-volume fracturing in late 2010; the policy was still in effect at press time, although Gov. Andrew Cuomo was actively seeking to lift the ban set in place by his predecessor, David Paterson.

Producers have banded together to form the Marcellus Shale Coalition, which opens the lines of communication among community members, legislators, and regulators, provides facts about oil and gas drilling, and seeks to address ongoing matters such as water disposal.

With funding provided by the Marcellus Shale Coalition, the Pennsylvania State University's College of Earth and Mineral Sciences issued a report about the Pennsylvania Marcellus natural gas industry's status, economic impacts, and future potential in July 2011.

The findings show that during 2010, Marcellus development in Pennsylvania generated $11.2 billion in value added (the regional equivalent of gross domestic product), contributed $1.1 billion in state and local tax revenues, and "supported nearly 140,000 jobs. Given this success, Marcellus producers are planning significant investment increases, generating more than $12.8 billion in value added in 2011 and $14.5 billion in 2012. According to the Penn State report, this higher economic activity will supply an additional $2.6 billion in state and local tax revenues for 2011 and 2012, with employment expanding to more than 156,000 jobs this year and more than 180,000 in the next. The study also projects that Marcellus gas production could rise to more than 17 Bcf/d by 2020, making the shale play the single largest producing gas field in the US.

Although potential regulatory changes, service constraints, water issues, and external scrutiny could put a damper on activity in the popular shale play, the Marcellus is alive and well. Natural gas output at year-end 2010 from the Pennsylvania Marcellus was nearly 2 Bcf/d, will likely average 3.5 Bcf/d during 2011, and could reach more than 6 Bcf/d in 2012, Penn State researchers said.

And according to FBR Capital Markets Managing Director Robert MacKenzie, 125-plus rigs are expected to drill more than 6,000 wells and complete more than 50,000 frac stages in the play in the next 30 months.

Servicing the Marcellus shale

As advanced well stimulation techniques continue to increase Marcellus well productivity, Baker Hughes has introduced a new wave of products to further enhance drilling and completion of wells in the area. According to Robin Robinson, vice president of marketing for Baker Hughes' US Land Region, the company has deployed its BJ SmartCare frac fluids offerings (including a viscosified 'green' friction reducer component), gas-tight cement slurries, and BJ ScaleSorb products in the Marcellus. Robinson cited Baker Hughes Opti-Port multistage fracturing system, BJ LiteProp, Baker Hughes FracPoint completion system, BJ SaltSorb solid salt inhibitor, and BJ BioSorb among the company's future products. Baker Hughes also provides comprehensive geoscience services from coring to the advanced Baker Hughes RockView formation analysis to quantify gas in place and total organic carbon content, Robinson said.

As for new services in the Marcellus, Robinson noted that Baker Hughes is launching water management and reservoir development services for better reservoir optimization.

A vital source for cleaner energy

Marcellus shale player EQT Corp. describes the Marcellus as a "huge opportunity," not only for the company but for the people in the region as well as the US economy. "Domestically produced natural gas has the ability to break America's dependence on foreign energy," said public relations manager Karla Olsen. "It also has the ability to create jobs during difficult economic times."

Accelerating production in the Marcellus – a megashale for the ages – could propel natural gas as the leading alternative fuel in the coming decades. After all, it is cheaper, cleaner, and more abundant than oil, and it is American, Olsen said.

But Marcellus shale development must ultimately prevail against infrastructure constraints and regulatory and environmental complexities to bring the shale's overwhelming production potential to bear.

The top five operators in the Marcellus shale are Range Resources, Chesapeake, Talisman, Cabot Oil & Gas, and East Resources. (Source: Rystad, Hart Energy’s North American Shale Quarterly Report)