Pennsylvania’s natural gas production has risen steadily in 2012 despite a significant reduction in the number of new natural gas wells being drilled by operators.

The August 23 Natural Gas Weekly Update examined the slowing pace of natural gas drilling in Pennsylvania, noting that the number of new natural gas wells started per day in 2012 has declined sharply in recent months. The state’s natural gas production, however, continues to increase despite the reduction in new well starts. According to BENTEK Energy LLC (Bentek), Pennsylvania’s natural gas production has increased every month in 2012, rising from an average of about 4.4 billion cubic feet (Bcf) per day in January to approximately 5.9 Bcf per day in August. As with production increases in recent years, the rising 2012 volumes are associated predominantly with horizontal drilling programs in sections of the Marcellus and other shale formations.

Natural gas outlook: Futures prices trend steadily higher

The state’s increasing natural gas production in 2012 is largely a function of a robust inventory of producing wells, particularly the relatively highly-productive horizontal wells drilled and completed during the past three to four years. The drainage area of wells – and therefore their productive potential – increases significantly by switching drilling orientation from vertical to horizontal, and expands even further with longer horizontal laterals. Underscoring the likelihood of continued natural gas production increases in Pennsylvania is the state’s large backlog of already drilled but not yet producing natural gas wells, as well as the impending completion of pipeline projects necessary to market the natural gas.

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Natural gas prices increased over the report week at most spot market locations. For example, at the Sumas, Henry Hub, SoCal, Chicago, and Algonquin Citigate trading points, spot prices increased between 9 cents and 16 cents for the week. The largest price increase occurred at the Algonquin Citygate trading point (serving Boston), which increased by 16 cents (4.5 percent) from $3.55 per MMBtu last Wednesday to $3.71 per MMBtu yesterday.

The NYMEX October 2012 futures contract rose by 9.6 percent from $2.795 per MMBtu last Wednesday to $3.063 per MMBtu yesterday. The 12-Month Strip (average of October 2012 to September 2013 contracts) increased by 6.7 percent over the same period, from $3.290 per MMBtu last Wednesday to $3.510 per MMBtu yesterday.

Natural gas outlook: Futures prices trend steadily higher

Total consumption for the report week registered an overall decrease, driven by a significant decrease in the power sector. According to estimates from Bentek, domestic natural gas consumption declined by 5.0 percent from last week, driven by decreases of 14.6 percent in the power sector due to cooler weather. Consumption in the industrial and residential/ commercial sectors increased by 1.6 percent and 17.6 percent, respectively.

Total supply for the week increased by 2.3 percent, driven by an increase in domestic production. According to Bentek estimates, domestic weekly dry gas production was 3.1 percent higher than the previous week and 2.2 percent above the same time last year. Imports from Canada decreased by 6.4 percent to 5.3 Bcf. Liquefied natural gas (LNG) sendout dropped sharply, down 11.1 percent from last week to 0.2 Bcf; sendout volumes remain well below (47.8 percent) year-ago levels.

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Working natural gas in storage increased to 3,429 Bcf as of Friday, September 7, according to EIA’s WNGSR. This represents an implied net injection of 27 Bcf from the previous week. This week’s injection was 45 Bcf below the 5-year (2007-2011) average injection of 72 Bcf, and 53 Bcf below last year’s injection of 80 Bcf. Inventories are currently 342 Bcf (11.1 percent) greater than last year at this time and 284 Bcf (9.0 percent) greater than the 5-year average.

Two of the three storage regions posted increases this week. Inventories in the East and West regions increased by 38 Bcf (the 5-year average net injection is 51 Bcf) and 2 Bcf (the 5-year average net injection is 6 Bcf), respectively. The Producing region posted a decrease of 13 Bcf (the 5-year average net injection is 14 Bcf). In the Producing Region, working natural gas inventories decreased 14 Bcf (6.3 percent) in salt cavern facilities and remained at the previous week’s level in nonsalt cavern facilities.

Temperatures during the storage report week were 5.1 degrees warmer than the 30-year normal temperature and 4.0 degrees warmer than the same period last year. Temperatures in the lower 48 States averaged 76.1 degrees, compared to 72.1 last year and the 30-year normal of 71.0 degrees. During the week all regions were warmer than normal, particularly the East North Central and West North Central Census divisions in the Midwest, which, respectively, averaged 7.7 and 7.1 degrees warmer than the 30-year normal.

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