Although there are some complicating factors, the growth of Marcellus Shale natural gas production in the area from West Virginia through Pennsylvania into Central New York is expected to eventually reduce the market-topping prices that Northeast citygates have experienced in recent years.
The addition of available supply from the recently completed eastern terminus of Rockies Express Pipeline (REX) at Clarington, OH, also is a factor in the expectation of softer basis in the Northeast market. However, at least one Gulf Coast producer questioned whether declining Rockies production would be able to keep deliveries through Clarington full.
Advancement of Marcellus production faces a few challenges, however. As an NGI headline said in mid-October, "Shale Skeptic Says Plays Not All They're Frac'd Up to Be" (see NGI, Oct. 19), in which analyst Art Berman said he doesn't believe producers are being up front about how much it ultimately will cost to recover shale gas.
The primary Marcellus advantage is that it's a relatively low-cost production area that is also relatively close to a large-demand center in the Northeast, said Teri Viswanath, director of Fundamental Energy Research for Credit Suisse Securities (USA) in Houston. However, its impact will be down the road because of market competition from the Horn River and Montney plays in British Columbia and Haynesville in Louisiana, she said.
There is relatively little processing and pipe takeaway capacity in the Marcellus so far, Viswanath said, adding that eventually it will be an important production play but for the time being its effect will be blunted by an already well-supplied market. It may require the backing off of higher-cost production for Marcellus gas to make a greater impact, Viswanath said. It all boils down to "too little demand for too much supply" currently.
The Northeast's normal premium prices and high basis will continue for a while longer "because of extending that last mile of pipeline past bottlenecks," Viswanath said. Delivery capacity is still lacking to some extent, so she doesn't see any great cut in Northeast price premiums soon. There is still a problem of pipeline capacity congestion near the market area, she added.
Also, Marcellus production faces the gas-on-gas competition with REX deliveries to Ohio that can access the East Coast, Viswanath said. The bottom line is that there is virtually "no demand" in the Northeast market currently, which is resulting in a lower call on Canadian imports.
She doesn't think hydraulic fracturing (hydrofracing) controversies in the Marcellus production area will be significant. The "pecking order" will continue to be the least-cost source of gas, "and Marcellus is there" for the Northeast. She expects Marcellus development to continue to weaken Gulf Coast basis, as will expected increases in liquefied natural gas deliveries to the U.S.
Marcellus is a relatively new arrival to the shale play boom and does not have nearly as much pipeline capacity as the Gulf Coast, said Patrick Rau, an independent energy analyst. It will take at least "a couple of years for any more meaningful pipe additions to get started" in the Marcellus play, he said.
Longer term, El Paso Corp.'s Ruby Pipeline will start up in a couple of years and create greater pressure on Rockies production to fill it in addition to continue filling REX throughput into Ohio to supply the East Coast, Rau said. However, mitigating factors include Gothic and Mancos, being two of the biggest shale plays under way in the Rockies, he said, but they are in early development. Also, many newer, more productive rigs are being added to the gas rig count, he said. And Questar and at least one other producer are thinking about going from 10-acre to five-acre spacing for wells in the Pinedale Anticline area, which would tend to be another source of increased Rockies production, Rau said.
He said growing Marcellus production should reduce Appalachian prices and tighten Northeast basis, but both areas will still carry a premium price over most other markets for the foreseeable future. Obviously it will be cheaper to move gas from Appalachia to the Northeast than from the Gulf Coast, so that should eventually depress Gulf Coast prices a bit, he said.
SunTrust Robinson Humphrey analyst Cameron Horwitz made a telling comment on the recent market shift. "You had this pipeline buildout to access premium markets, and now they're not so premium any more," he said. Horwitz was primarily referring to such projects as REX, which were meant to allow Rockies supplies -- previously the "poor boy" section of the overall market -- to access the previously much more lucrative markets of the Midwest and Northeast.
As much as 489 Tcf of technically recoverable natural gas resources may be held in the Marcellus Shale, according to Terry Engelder, a geosciences professor at Pennsylvania State University (see NGI, Nov. 10, 2008).
One barrier to Marcellus development was averted at least temporarily when Pennsylvania Gov. Ed Rendell said imposing a state severance tax on growing Marcellus Shale production could hurt his state's natural gas industry (see NGI, Sept. 2).
Other hurdles have recently come to light. Residents of a northeastern Pennsylvania town in the heart of the Marcellus Shale sued Cabot Oil & Gas and a service operator in late November (see NGI, Nov. 23a), claiming that their water wells became contaminated when the producer used hydrofracing in the course of drilling and stimulating natural gas wells.
Though not quite as extensive as the number of proposed takeaway projects for the Haynesville Shale in North Louisiana and East Texas (see NGI, Nov. 9a), largely because the Marcellus is a relative latecomer to the shale boom compared to the Haynesville, some additions to pipeline capacity from Marcellus and Appalachia in general have been proposed during the past year.
They include Spectra Energy's proposal for the Texas Eastern Appalachia to Market Expansion 2013 (TEAM 2013), with an estimated late 2013 in-service date and a capacity addition of 500 MMcf/d (see NGI, Nov. 30); the NYMarc project by Iroquois Gas Transmission, which the pipe said would connect Marcellus gas supplies to New York, New England and Eastern Canada and is targeted for service as early as Nov. 1, 2014 (see NGI, Nov. 23b); and Dominion Energy's Appalachian Gateway Project, which CEO Gary Sypolt said is fully subscribed by Marcellus Shale and other Appalachian producers for total firm capacity of 484,260 Dth/d and is expected to begin service in 2012 (see NGI, Oct. 5).
Other prospective or completed additions to Marcellus-area infrastructure are a 120 MMcf/d processing plant to be built in West Virginia by MarkWest Liberty Midstream & Resources, which recently gained subsidiaries of Chesapeake Energy and StatoilHydro as customers (see NGI, Sept. 21); and Inergy Midstream saying in late August that open seasons on two Northeast pipeline proposals had received a resounding response and both projects would move forward with expected in-service targets in fall 2011 (see NGI, Aug. 31).
Buffalo-based National Fuel Gas in mid-November placed into service its Covington Gathering System, which was aimed at serving two Marcellus wells by producer subsidiary Seneca Resources as well as other local production (see NGI, Nov. 9b). In addition, its National Fuel Gas Supply subsidiary held a binding open season for incremental transportation capacity from new and existing system interconnects in the Marcellus Shale fairway in central Pennsylvania that would serve Northeast markets via the Leidy (PA) Hub.
Williams and Dominion announced in August that they are joining forces to develop the Keystone Connector pipeline, which would carry up to 1 Bcf/d from the REX terminus at Clarington to eastern and Mid-Atlantic markets, with an in-service date expected by 2013 (see NGI, Aug. 17).
NiSource said in August it "may spend as much as $1.2 billion" on a pair of pipelines by 2016 and look to partners to invest another $500 million in an effort to increase capacity out of the Marcellus Shale.
And central New York LDC Corning Natural Gas (CNG) recently completed a pipeline to Pennsylvania that taps Marcellus Shale production for delivery to CNG customers in New York state (see NGI, Feb. 9).
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