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Burgeoning Marcellus Production Widens Price Differential

Making good on its comparisons to Saudi Arabia in terms of natural energy resources, the Marcellus Shale has been making its heft felt on the Northeast region's pipelines, wreaking havoc with traditional basis on lines such as Tennessee Gas Pipeline.

The capacity constraint-induced price distortion started happening in earnest in Tennessee's northeastern Zones 4, 5, and 6 after the Fourth of July weekend as production continues to grow from the play.

Tennessee's mainline from the Southwest splits in Western Pennsylvania into the 200 and 300 lines, which parallel each other flowing west-to-east until they reconnect in western New England. But only Line 300 travels through the heart of the Marcellus development in Pennsylvania; Line 200 runs farther north through New York State, also touching on the Marcellus, but it's in an area that so far has not been developed.

For August averages there was approximately a 42-cent differential between prices on Tennessee's Line 200 and Line 300 in the pipeline's Zone 4, with Line 200 fetching the premium. In Zone 5 the Line 200 premium was about 23 cents. And in Zone 6 the Line 200 premium was about 34 cents.

As recently as last Friday Tennessee Zone 4 was seeing a price range of $2.35-4.21, and Line 300 hit a bottom end of $2.25 -- by far the market's lowest recent pricing -- on the trading date of Aug. 30. Only three months ago the Zone 4 range was a mere $4.88-5.10.

For a Northeast utility buyer, it would be nice to get those Line 300 low prices, but he told Shale Daily it was unavailable because the utility doesn't have transportation capacity there. However, he reported buying relatively cheap Marcellus gas delivered via Tennessee by suppliers that do hold the necessary capacity rights.

Besides the price divergence between the two lines in the spot market, the forward basis market is indicating a differential going into next year.

"What we have is very rapid production and development in a very concentrated area, which unfortunately is on the very smallest pipe that exists in Pennsylvania," Rodney Waller, Range Resources Corp. senior vice president, told Shale Daily recently.

Four counties in northeast Pennsylvania accounted for about 65% of Marcellus production last year, he said. Add to that two counties in southwest Pennsylvania -- Washington and Greene -- that accounted for 23%, for a total of 88% of the play's production coming out of six counties, Waller observed. "So anytime you have that much concentrated development, you're going to outgrow the infrastructure."

Because of the evolution in the market caused by the growing Marcellus production, Shale Daily is splitting its price index for Tennessee Zones 4, 5 and 6, each into two segments: one for the Line 200 and one for the Line 300 (see Shale Daily's Price Notice). This will more accurately reflect the price differences. Besides reflecting lower prices, the capacity-constrained Line 300, where gas appears to be backing up at key receipt and delivery points, demonstrates much wider spreads in daily reporting and much more volatility, day-to-day.

Tennessee parent El Paso Corp. is seeking to remedy the situation. The company has proposed the Northeast Upgrade Project, which would allow an additional 636,000 Dth/d to be transported on the Line 300 in Pennsylvania and delivered to markets in the Northeast. Tennessee proposes to upgrade its existing 24-inch diameter Line 300 by constructing five 30-inch diameter pipeline loops and modifying four compression stations

Others also are looking to fill the pipeline gap. Williams Partners LP has the 33-mile, 24-inch diameter Springville gathering pipeline, which is currently under construction to connect a northeast Pennsylvania gathering system to Williams Partners' Transco interstate gas pipeline. The partnership said its gathering system in northeast Pennsylvania is expected to ultimately have a capacity of 1.25 Bcf/d.

Laser Northeast Gathering Co. LLC began building the Pennsylvania portion of its Susquehanna Gathering System in February (see Shale Daily, Feb. 3). The $50 million first phase of the system will run 30 miles from Susquehanna County to the Millennium interstate pipeline in Broome County, NY, and is expected to come online in the third quarter (see Shale Daily, July 15).

The Federal Energy Regulatory Commission recently issued a favorable environmental assessment of Inergy subsidiary Central New York Oil and Gas Co.'s (CNYOG) MARC-I Hub Line Project, which would allow for the delivery of Marcellus Shale and Trenton Black River gas to Northeast markets (see Shale Daily, June 2). The project calls for a 39-mile, 30-inch diameter pipeline in Bradford, Sullivan and Lycoming counties plus compression and would have about 550,000 Dth/d of firm capacity scheduled for service in fall 2012.

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