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FERC Report: Shales Boost Production, Lower Prices

Continuing high natural gas production levels driving prices to the sub-$2 level raise concerns of an eventual production bust that could result in higher prices for producers, according to a market report Thursday by FERC's Office of Enforcement (OE).

The Federal Energy Regulatory Commission (FERC) hasn't seen "a lot of production decreases" in the market, said OE's Valeria Annibali, in delivering the "2011 State of the Markets" report to the commissioners at their regular open meeting. Rather producers appear to be shifting from developing dry gas wells to oil and natural gas liquids (NGL) wells. Although some dry gas-only wells might be shut in, production of gas associated with NGLs and oil is continuing to grow, so it has balanced that out. "We haven't seen overall effects of a decline in production," she said.

Gas production reached an all-time record in 2011, surpassing levels last seen in the 1970s, the OE report said. Supply outpaced demand, which led to record-high storage going into the 2011-2012 winter and gas prices fell to lows not seen since the early 2000s. Gas consumption rose a paltry 1% to a little more than 60 Bcf/d in 2011 over the prior year, with much of the growth coming from the power sector.

Dry gas production grew 7% to 65 Bcf/d, exceeding a record last set 25 years ago, according to the report. The growth was primarily driven by shale development, which accounted for one-third of total dry gas production by the end of 2011.

Annibali said FERC hasn't seen "a lot of production decreases" in the market, rather producers appear to be shifting from developing dry gas wells to oil and natural gas liquids (NGL) wells. Although some dry gas-only wells might be shut in, production of gas associated with NGLs and oil is continuing to grow, so it has balanced that out. "We haven't seen overall effects of a decline in production," she said.

Dry gas shales, such as the Haynesville in Louisiana, the Fayetteville in Arkansas and the Barnett in Texas, remained the largest producing shales in 2011. However, the fastest growing shales were found in the liquids-rich shale basins, such as the Marcellus Shale, the report said (see Shale Daily, March 15). Production in the Marcellus doubled to nearly 6 Bcf/d by the end of 2011, while production in the Eagle Ford Shale in South Texas grew 64% to 3 Bcf/d over the same period, the highest growth of any shale.

All pricing points declined last year. The report estimated that average gas spot prices across the nation fell by approximately 7%. This winter was the warmest in 60 years, and the Northeast, which usually sees the highest winter prices, saw no sustained price spikes. "The most recent Nymex forward curve for natural gas shows that the market anticipates that prices at Henry Hub will remain under $4/MMBtu through 2014," OE staff said.

Another concern with low prices is that it will continue to make gas more attractive to power generation, which could create capacity problems on interstate pipelines.

"New pipelines completed during 2011 linked growing supply sources to markets and contributed to shrinking regional price differences. In some cases the market price of natural gas between regions declined to less than variable transportation costs...We have also seen a decline in the seasonal difference between winter and summer natural gas prices," the report said.

In addition to impacting prices, shale development is affecting gas flows on traditional long-haul pipelines. "For example, we saw Rockies natural gas flows to the Northeast on Rockies Express Pipeline (REX) decline more than 40% since early November 2010, from 1.7 Bcf/d to 1 Bcf/d. The decline was so severe that S&P [Standard & Poor's] reduced REX's credit rating."

The Rockies gas has been displaced in the Northeast by increased flows of the cheaper Marcellus Shale gas from Pennsylvania, as well as competition from Ruby Pipeline providing producers with access to the northern California market.

High production levels and moderate weather, leading to overflowing storage argue against construction of any new storage facilities, the FERC report said.

"Although very high storage levels so early in the refill season indicate a need for additional storage, market conditions do not generally support the building of new storage...Winter-summer gas price spreads are at historically low levels and barely cover the cost of storing gas," OE said in its report. It said gas in inventory at the end of March was more than 50% higher than the five-year average, which was a record.

"Storage value has significantly declined over the past couple of years" due to lower prices and other factors, Annibali said. Salt cavern storage facilities in the Gulf Coast have been the most affected.

At the end of March, the official close of the winter heating season, working inventories totaled 2,479 Bcf, which was 887 Bcf more than last year's level and 934 Bcf above the five-year average, the Energy Information Administration recently reported.

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