You only need three reasons to understand why rising US gas production is going to keep natural gas prices low for years to come.

Those reasons are Susquehanna, Greene and Washington counties in Pennsylvania. Like the real-estate mantra that bleats location, location, location as key to success, these three counties, plus Wyoming and Bradford counties in northeastern Pennsylvania, are the main drivers in rising onshore natural gas production.

And more is on the way. In fact, the Pennsylvanian Marcellus shale as a whole should peak at 20 billion cubic feet per day of natural gas production by 2019, roughly double current levels in fewer than six years.

Those three Pennsylvanian counties sit atop sweet spots in the Marcellus shale. Sweet-spot drilling accounts for 20% of Pennsylvania's horizontal wells, according to Cameron Horwitz, director of E&P research at Houston-based US Capital Advisors. However, after a regional study of 2,000 wells, Horwitz discovered that sweet-spot drilling has a disproportionate impact on gas supply. He presented the results to attendees at Hart Energy's DUG East conference held in Pittsburgh in November.

Pennsylvanian sweet spots—sort of the Hershey kisses of the Marcellus shale—include one example in which production from just 50 dry-gas wells in Susquehanna County is on track to generate estimated ultimate recoveries (EURs) of 14 billion cubic feet (Bcf) per well.

“These sweet spot areas we've identified… will be the driver of (future) US gas supply,” Horwitz told DUG East attendees. “Even at $4 gas, we still have a lot of work to do here, likely over two decades, so it's just a very bright future to look forward to.”

The size of the sweet-spot prize is staggering in an industry where gas production continues to rise despite wholesale cutbacks in the rig count. The Pennsylvanian Marcellus, for example, has seen a 50% reduction in gas-directed drilling since March 2012. Despite that, Marcellus production continues to rise, with just two counties in Pennsylvania, Susquehanna and Bradford, producing a combined 4 Bcf per day, or more than the entire US Gulf of Mexico, according to Horwitz.

In fact, those two counties generate production equal to about 80% of the gas produced daily in the legendary Barnett shale. But those two counties in northeastern Pennsylvania are just one element in a larger theme.

“We see about 200 trillion cubic feet of gas equivalent in the Pennsylvania Marcellus shale that is still viable at a $4 gas price, or less,” Horwitz said. “That's about 30,000 remaining drilling locations. If you think about the 85 rigs still running in the play and 1,500 wells drilled each year, that is roughly 20 years left of gas, even if gas prices stay sub-$4 throughout that whole time.”

Take note, conventional gas drillers and dry-gas-oriented E&Ps in the Rockies, Midcontinent and Texas: In Susquehanna County, one Cabot Oil & Gas Corp. well produced 7 Bcf of gas in 13 months. At an average 20 million cubic feet per day for a year, it is the best producing Marcellus well to date.

According to Horwitz, Cabot's Susquehanna County wells are generating EURs that average 13.8 Bcf per well, followed by Chief Oil & Gas LLC at 10.7 Bcf. Decline curves on one Cabot well are on track to produce 40 Bcf over the life of the well. On average, a $10-million dry-gas well in Susquehanna County produces a 110% internal rate of return under present pricing and breaks even at $1.95 gas.

Horwitz defined the Marcellus gas sweet spots as areas that produce an EUR of 8 Bcf or greater with wells economic at $3 gas. Using these criteria, Pennsylvania has two emerging sweet spots at opposite corners of the state. In the dry-gas northeastern Pennsylvania sweet spot, Wyoming County leads the way with average EURs north of 11 Bcf. Most of the activity is in the northern half of the county.

Neighboring Susquehanna County is second, with average EURs of 9 Bcf.

The second sweet spot, in the wet-gas area of southwestern Pennsylvania, is led by Greene County with EURs per well averaging 8.1 Bcf. Within the Greene County dry-gas core, operators have drilled multiple wells that have generated decline curves suggesting EURs of 12 Bcf, roughly double the “average” Marcellus well.

Operators with the best well results in Greene County include Rice Energy, which is generating average EURs of 12.3 Bcf, and EQT with a per-well EUR average of 11.8 Bcf. At a $7-million well cost, Greene County dry-gas wells produce an internal rate of return (IRR) of 95% at $4 gas and break even at $2.05 gas.

The gas play grades into a wet-gas zone in neighboring Washington County. Here, wells produce a stream that is 40% liquids before natural gas liquids (NGL) processing. Range Resources Corp. is the largest operator in the wet-gas zone, though privately held Rice Energy is reporting leading Washington County EURs of 10.3 Bcf per well while EQT is second, with an average 9.1 Bcf. A $7-million Washington County well produces a 77% IRR at $4 gas and an aggregate $40 NGL barrel. The break even for a well in the wet-gas portion of the Marcellus sweet spot is 40 cents.

“Gas is essentially being subsidized by the liquids,” Horwitz said. “Gas is almost insensitive to gas price in this part of the play.”

Horwitz pegged current production out of the Pennsylvanian Marcellus at 10 Bcf of gas per day.

“Pretty amazing, when you consider that three years ago production was less than 1 Bcf per day. That's a compound average growth rate of over 125% each year—pretty incredible,” Horwitz said.

Horwitz's Pennsylvanian scorecard shows 12,000 horizontal wells permitted and 6,000 horizontal wells drilled during the past six years. Operators were permitting 200 to 300 wells per month at the peak in 2011 and 2012.

“We've subsequently seen a slowdown in some of that activity to 100 to 200 wells per month on average, and we've seen a pretty significant high-grading as to where that permitting activity is taking place,” Horwitz said. “Counties such as Bradford, Susquehanna, Greene, Lycoming and Washington have taken a disproportionate share of that activity.”

The Marcellus rig count has been range bound between 80 and 100 rigs since August 2012 and is currently slightly above the midpoint in that range. “This will probably hold true for the next couple years,” Horwitz said.

Also holding true is the rising flow of Marcellus natural gas, an event that has national implications for future domestic gas production and for natural gas pricing.

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