Much has been written about the Marcellus shales, the largest shale gas field in the US.  The rapid drilling program has been responsible for a supply glut, which drove spot prices down this year as low as $2.00 per mmBtu.  Since then, prices have recovered somewhat, to the $3.75 range.  Until recently, it has been hard to get a good view of the supply side dynamics.  This is largely because the shale phenomenon is so new that things have taken a while to sort out and for equilibriums to become established.  We are now beginning to get a clearer picture.

In the near term, production figures will continue to rise, even as rig counts start to fall.  Bentek, an analyst focusing in this area, predicts that Marcellus production will increase by 78% by 2015.  The main reason for the increased production is simple: more than 1000 wills drilled over the past year and half have not yet been brought on line.  That’s almost a third of the 2,879 wells currently completed in PA.

This overproduction is largely caused by a use-it-or-lose-it leasing dynamic which requires drillers to be actively producing hydrocarbons in order to extend leases.  As a consequence, drillers continued to punch holes in the ground even as the oversupply situation became clear.  But short-term and long-term market dynamics are two very different things.  The immediate land leasing rush is over, and producers are already responding to market prices and moving rigs south and west to the more lucrative oil shales in Louisiana, Texas, Ohio, and elsewhere.  In fact, the Baker Hughes rig count for PA dropped from 111 last October to just 63 this past month – the lowest number of rigs in three years.  To put that in some perspective, though, the rigs can do much more in a shorter time than just a few years ago, as learning curves come down and productivity increases

via Driven by Oil Shale Economics, Natural Gas Prices Primed for Slow and Steady Rise – Forbes.