An infrastructure development slowdown across the Marcellus Shale region over the next 12 months will sharply reduce the rate of production growth, to 1.3 Bcf/d from growth of 2.3 Bcf/d in the last 12 months, according to FBR Capital Markets.
This "near-term constraint could put upward pressure on natural gas prices next year as other higher-cost areas like the Haynesville will need to respond to the supply deficit," wrote analyst Rehan Rashid and his team. Based on the smaller level of gains in Marcellus output, FBR reiterated that natural gas prices may climb to $4.50/Mcf in 2013 and beyond.
Marcellus production overall is still on an upward path and is expected to jump to 10.4 Bcf/d in the final three months of 2014 from 7.1 Bcf/d in 4Q2012. The region's productive capacity "far outpaces" Northeast gas demand and ultimately would need to be exported to other markets. The region's "net exportability and self-sufficiency" would have big implications on Marcellus -- and the entire country's -- realized prices.
"Assuming 500 Tcfe recoverable reserves, we calculate the unconstrained productive potential of Marcellus to be around 18 Bcf/d by 2020. With current average Northeast demand of 12 Bcf/d, and a range of 9 Bcf/d in the shoulder months and 17 Bcf/d in the winter months, we expect the Northeast to be a net exporter of gas into storage or other demand centers starting in the shoulder months of next year and attain full-year supply-demand balance by 2015."
In three years, total takeaway capacity from the Marcellus is expected to increase by an additional 6.3 Bcf/d from current levels, according to FBR calculations. "When combined with current total Northeast U.S. production of about 8.5 Bcf/d and examined within the context of total U.S. 2012 natural gas demand of 69 Bcf/d, it becomes clear that Marcellus will play a dominant role in the future U.S. natural gas supply picture.
"However, the intermediate-term growth rate from Northeast (NE) Marcellus will be somewhat constrained by interstate pipeline takeaway capacity growth, and Southwest (SW) Marcellus will additionally be constrained by processing capacity growth."
Production growth in the NE Marcellus "has been significant," said the analyst, but the growth rate "should mute nearer term for takeaway capacity to catch up. We estimate that natural gas production from NE Marcellus increased nearly 60% to 4.9 Bcf/d during 4Q2012 from 3.1 Bcf/d during 4Q2011."
FBR is estimating that total takeaway capacity for the NE Marcellus producers now is about 5.425 Bcf/d, and should increase to 7.426 Bcf/d by the end of 2013. Output would remain flat through 2014, then jump to 8.545 Bcf/d by year-end 2015 and to 9.345 Bcf/d by the end of 2016. Based on average timing for new operation start-ups, FBR is estimating full-year 2013 capacity to be 5,870 MMcf/d; 2014 at 7,426 MMcf/d; 2015 at 7,680 MMcf/d; and 2016 to be 9,195 MMcf/d.
Over the next three years, an estimated 3.9 Bcf/d of pipeline takeaway capacity additions are planned for the Northeast market, and future growth should mirror planned pipeline takeaway capacity expansion, according to FBR. Three pipelines provide takeaway capacity to the NE Marcellus region: the Tennessee Gas Pipeline, the Millennium Pipeline and Williams' Transcontinental Gas Pipe Line (Transco).
"We estimate that about 0.5 Bcf/d of capacity will be added early next year as the Williams gathering system comes on line," said the FBR team.
In early November the Federal Energy Regulatory Commission approved the Transco Northeast Supply Link project to provide additional firm transportation service from the Marcellus shale play to meet growing demand for natural gas in Pennsylvania, New Jersey and New York City (see NGI, Nov. 12). The project, expected to be completed in November 2013, would provide 250,000 Dth/d of incremental firm transportation capacity from supply interconnections on Transco's Leidy Line in Pennsylvania to its 210 Market Pool in New Jersey and the Manhattan, Central Manhattan and Narrows delivery points in New York City.
"The next big increase in capacity is not expected until late 4Q2013 as four different projects come on line to add 1.4 Bcf/d," said Rashid. "As such, after the nearly 60% increase since 4Q2011, we expect NE Marcellus area production to grow only an additional 18% through 4Q2013, with a cumulative growth of 43% to 7.0 Bcf/d through 4Q2014."
Growth momentum also continues in the southwestern part of the play. Through 2016 about 2.4 Bcf/d of pipeline takeaway additions are scheduled for that market, said the FBR analyst. Another 4 Bcf/d of processing capacity also is expected over the next two to three years.
"As a result, we estimate that production from SW Marcellus (wet as well as dry areas) will grow 40% to 2.2 Bcf/d during 4Q2012 from 1.6 Bcf/d during 4Q2011." The output increase would result in an additional 28% growth by the end of 2013 to 2.8 Bcf/d and a cumulative growth of 56% to 3.4 Bcf/d by 4Q2014.
"We estimate total takeaway capacity for SW Marcellus producers to be currently around 3,000 MMcf/d. We expect this to grow to 3,400 MMcf/d by year-end 2013, 4,000 MMcf/d by year-end 2014, and 5,500 MMcf/d by year-end 2015." Based on average timing for new start-ups, "we estimate full-year 2013 capacity additions to be 350 MMcf/d, 2014 to be 1,025 MMcf/d, and 2015 to be 2,600 MMcf/d."
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