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Appalachia Forecast to Dominate Long-Term NatGas Production

Natural gas prices are not likely to increase significantly in the coming years, especially if production in the Appalachian Basin continues to grow, according to a group of analysts that spoke Wednesday at an industry conference in Pittsburgh.

With the Appalachian gas glut expected to persist, pipeline takeaway steadily increasing from the region and demand lagging supply, there doesn't appear to be much room for prices to improve until significant overseas liquified natural gas deliveries begin around 2019, said BTU Analytics LLC analyst Kathryn Downey Miller.

"We all know that it's marginal supply and demand that sets price," she said. "To this point, the Utica and Marcellus impact on setting price in the U.S. has been limited by pipeline takeaway capacity. However, over the next three years, that constraint is going to be lifted, and when that constraint is lifted, we expect that market prices in the U.S. are more than likely going to be linked to the cost of supply in the Northeast, as well as the cost of transportation from the Northeast to demand markets." 

The analysts presenting at Hart Energy’s DUG East Conference and Exhibition hailed the Marcellus for its economics, where finding and development costs are among some of the lowest in the onshore. With wells averaging about $6 million each to drill and complete, Miller said those costs are likely to keep gas prices down, especially as more of the basin’s supply begins to hit markets across the country.

"We're going to see that spreads to Henry Hub are going to collapse, and not necessarily in favor of better netbacks in the Northeast," she added. "As the Northeast becomes the marginal supply, we should see prices in the U.S. move lower."

As a result, Miller said Appalachian producers would continue to face significant pressure to contain costs as takeaway, supply and demand weigh on prices. Production in the basin has skyrocketed, going from 1.7 Bcf/d in the Marcellus in 2010 to a combined 19 Bcf/d from the Marcellus and Utica shales last month, according to the Energy Information Administration (EIA)

John Staub, a team leader in the EIA's Office of Petroleum, Natural Gas and Biofuels Analysis, said a marginal dip is expected in near-term Marcellus production, mostly as a result of gas-on-gas competition from production in other plays such as the Haynesville and Fayetteville shales, as well as associated gas from the Bakken Shale and Permian Basin.

Because of low operating costs and the resource base, Staub said the Marcellus in particular is projected to continue its dominance in U.S. natural gas production in the coming decades.

"You can clearly see how significant the Marcellus is; through 2013 it produced about 8 Tcf of dry gas, and we have close to 150 Tcf coming out of the play. And the Utica will contribute about 27 Tcf by 2040," he said. "In the long run, there's still a lot of resources there and as gas prices in our projections essentially double getting close to $8/Mcf by 2040 for Henry Hub prices, that allows for further development of the resource in the long-term."

Continued success in the basin, however, is expected to vary by producer.

"Winners and losers are going to be determined in different ways going forward," Miller said. "Up to this point, those with firm transportation were real winners, while those that didn't [have it], suffered the worst basis differentials in the market. As we see production being tempered by demand, rather than takeaway, we would expect that it's going to boil down to who has the best acreage and who's going to be able to manage costs."

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