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FERC's Wellinghoff Calls Shale 'the Quiet Revolution'

The natural gas market is in "good shape" as it heads into the 2010-2011 winter heating season due to the influx of shale gas, which has reshaped the industry, and the addition of new pipeline capacity to access the lower-priced supplies, said a FERC analyst Thursday.

Shale is "truly the quiet revolution" that has transformed the industry, FERC Chairman Jon Wellinghoff said. "What a happy position to be in to be worried about too much gas."

"Low gas prices are largely the result of the influx of new, low-cost shale gas, which has revolutionized the natural gas industry," Chris Ellsworth, an energy industry analyst for the Federal Energy Regulatory Commission's Office of Enforcement, said in presenting the "Winter 2010-11 Energy Market Assessment" at the Commission's Thursday open meeting.

"Production has reached levels not seen in more than 35 years; gas prices are moderate and storage is 90% full with about three weeks left in the traditional injection period. January [2011] gas prices on the futures market are around $4.13/MMBtu, only 76 cents above current spot prices, suggesting that financial markets see relatively low risk for high and volatile gas prices this winter. This time last year, the January futures price was $2.43/MMBtu higher than the spot gas prices," Ellsworth said

As the market heads into winter, gas inventories should end up close to last year's record level of 3.8 Tcf, FERC's analyst said.

In keeping with the trend over the past two years, prices for natural gas in the Northeast continue to grow closer to those at Henry Hub, Ellsworth said. On Oct. 1, New York prices were only $2.03/MMBtu higher than prices at the Henry Hub for January 2011. This is a substantial decline from comparable price differences of $4.03 in 2010 and $5.51 in 2009, he said.

The decline in the basis is not limited to the Northeast. "Development of new gas supplies and infrastructure has helped push basis lower nationwide. Compared to the same period last year, winter basis swaps have declined by 46% at Chicago, by 55% in the Pacific Northwest and by 32% in Appalachia," the FERC report said.

The geographical shift in gas production is changing the utilization of the nation's pipeline infrastructure. "This is apparent in the Northeast, where imports of Canadian gas have dropped by 50% since last October to less than 1 Bcf/d. Western Canadian gas is being replaced by cheaper sources, including 1.7 Bcf/d via the new Rockies Express Pipeline and Northeast production led by growth in [the] Marcellus Shale. Marcellus Shale gas production has doubled in the past 12 months to around 700 MMcf/d. [Some independent analysts are saying Marcellus production already has gone over 1 Bcf/d.] Together Marcellus production and Rockies supplies are beginning to compete successfully against traditional Gulf Coast supply," the FERC report said.

Ellsworth said his office is seeing the development of new pricing points due to shale development in the Barnett, Woodford and other shale plays, and some reduction in flows from the Henry Hub.

Natural gas production has grown 23% in the past five years to more than 59 Bcf/d from 48 Bcf/d in 2005. Most of the growth has come from shale gas, which now accounts for 20% of domestic gas production, the assessment said.

"Shale gas development has turned the economics of drilling for gas on its head. The cost of developing shale gas has declined and well productivity has increased as drillers gained experience with the new technology," it said. In some markets, the FERC report said the time needed to drill a shale gas well has plunged to days from just weeks. This has driven down breakeven costs for most gas shales to less than $4/MMBtu, and even lower where natural gas liquids such as propane, ethane and butane are present, according to the assessment.

"There is a possibility that the need to find a ready market for natural gas liquids could slow down shale gas development in some areas. Possible regulations in response to concerns about the impact of fracking fluids on the environment could affect future drilling plans" as well, it said.

Looking to the Gulf of Mexico, FERC estimated that production has dropped to 7 Bcf/d from more than 11 Bcf/d in 2006. The demand for North American liquefied natural gas (LNG) imports is expected drop this winter. "After peaking at a record 5 Bcf/d last January, gas supply from eight U.S., one Canadian and one Mexican LNG terminals has dropped to less than 1 Bcf/d," the FERC report said.

To provide access to the growing shale gas, the report said a considerable amount of new pipeline capacity has been added in the Northeast. Since spring, 503 MMcf/d of pipe capacity has been completed on top of the 5.6 Bcf/d added in 2008 and 2009, the agency said. By January, it expects an additional 725 MMcf/d of new pipeline and expansion capacity to be completed, resulting in a total of 1.2 Bcf/d of new capacity added in the Northeast since last winter.

Since the start of spring, FERC said there has been 345 MMcf/d of new pipeline capacity added in the West and 2.5 Bcf/d of capacity added in the Gulf and Southeast. "We expect another 3.5 Bcf/d in the West and 5.3 in the Gulf and Southeast to be added before the end of winter," it said.

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