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S&P: Marcellus Shale Output Rewriting Gas Flows, Pricing

Rapid development of the Marcellus Shale is attracting new exploration and production (E&P) activity, a trend that is affecting long-standing national and regional natural gas flows, as well as regional pricing, according to Standard & Poor's Ratings Services (S&P).

"The rapid increase in production is clearly reducing the area's dependence on gas imports from other areas, and this growing independence is affecting national supply dynamics and the premiums that local producers could previously charge," said S&P credit analyst Carin Dehne-Kiley.

Lower all-in costs, a higher natural gas liquids component relative to other producing areas and a prime location near major consuming centers will ensure that the Marcellus remains a key contributor to U.S. domestic natural gas supply, according to the report, "How the Marcellus Shale is Changing the Dynamics of the U.S. Energy Industry."

Development of the Marcellus will particularly benefit midstream and pipeline companies that are building or expanding infrastructure in the Northeast, and E&P companies that produce natural gas and natural gas liquids (NGL) in the region, according to S&P. Long-haul pipeline operators who are unable to reverse their pipeline flows and E&P companies producing natural gas in the U.S. Rockies or Canada to send to the Northeast, on the other hand, may not fare as well.

"Longer term, once sufficient takeaway capacity is in place, we expect low-cost production in the Marcellus to displace higher-cost production in other U.S. regions," the analysts concluded.

In a report earlier this year, S&P analysts said burgeoning development of shale gas plays in the United States "has changed the playing field for long-haul pipelines," diminishing the need to move natural gas along traditional west-to-east routes and leaving large stretches of pipeline underutilized (see NGI, June 11).

In the new report, S&P analysts said the Appalachian premium has collapsed and would likely remain minimal.

"Because natural gas utilities and gas distribution companies in the Northeast historically contracted for supply on long-haul pipelines from the Gulf Coast, Rockies, and Canada, they ended up paying transportation and fuel charges along with the actual gas charges. As a result, Appalachian producers could charge a premium for their gas, relative to other regions, as long as it didn't exceed the all-in cost for the imported supply (regional gas price plus transportation plus fuel costs)." The Marcellus-to-Henry Hub premium averaged about 20 cents/MMBtu between 2005 and 2010, according to the report.

Dominion Pipeline vs. Henry Hub basis differentials have tumbled since hitting 66 cents/MMBtu in August 2008, and have been at or below zero several times this year, according to NGI calculations.

But some utilities and distribution companies in the region have yet to switch to local natural gas suppliers, primarily due to existing long-term contracts "and perhaps some skepticism about the reliability of shale gas, given it is still a fairly recent phenomenon," the analysts said. "Consequently, we expect the northeast region to remain well supplied with natural gas, and the historical northeast gas premium to remain minimal."

In fact, there will eventually be more local gas supply than the region can consume, and up to 10 Bcf/d of new pipeline takeaway capacity will be needed, S&P said.

"Southwest Pennsylvania has notably more access to long-haul pipelines than northeast Pennsylvania, which has insufficient takeaway capacity because the extremely productive wells in the area have yielded significantly more output than originally anticipated," the analysts said. "Production volume is increasing so quickly, in fact, that space on takeaway pipelines is limited or non-existent in certain areas."

More natural gas liquids processing and pipeline infrastructure will also be needed in the Marcellus, they said.

Fitch Ratings said recently that the Marcellus Shale's location near high-consumption centers, its bountiful reserves and its chameleon-like ability to produce wet or dry natural gas in abundance have made it a worthwhile destination for midstream operators, and it should remain so for several years (see NGI, July 16).

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