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FERC: Shale Gas Increased Influence on Market in 2010

Natural gas supply and demand set new records in 2010, while regional changes in production -- including that from the nation's fast-growing shale plays -- altered the industry landscape, according to a state of the markets report issued Thursday by FERC's Office of Enforcement.

The nation's burgeoning shale plays helped to drive domestic gas production to more than 63 Bcf/d in late December, compared with 58 Bcf/d in early January 2010, according to the report.

"This growth can be attributed to increased shale gas production, which accounted for 23% of total U.S. production by the end of 2010, up from just 13% of total production two years before. Production from the Haynesville, Fayetteville and Marcellus basins alone grew more than 7 Bcf/d in the four years from January 2007 to January 2011. Some market analysts forecast shale gas could account for one-third of total U.S. production by the end of 2015," FERC said in the report.

Shale plays were able to overcome continued low gas prices because of their natural gas liquids (NGL) production.

"In some plays, such as the Eagle Ford and North Barnett Shale in Texas and the Bakken Field in the Dakotas, the breakeven cost for natural gas has fallen to zero, and natural gas has essentially become a byproduct of oil and NGL drilling," according to the report.

But will the growing NGL production find the infrastructure it needs to move to market?

"We saw record NGL production last fall, but it really varies," said Chris Ellsworth, energy industry analyst with the Office of Enforcement. "If you take the Eagle Ford Shale in South Texas, there does seem to be the infrastructure in place that it won't be a constraint there. The Bakken Field in the Dakotas is a little different. With increased production there, they may have to add infrastructure...You probably see the most constraints [in the Marcellus Shale] potentially going forward, because there's no ethane market in the Northeast. So that ethane is going to have to be moved either to the Gulf Coast or southern Ontario, where there are petrochemical facilities" (see related story).

Last year's state of the markets report for 2009 highlighted the development of a national gas market due to increases in domestic production, additional pipeline infrastructure and increased storage capacity (see Daily GPI, April 16, 2010). That trend continued in 2010, "with regional price differences increasingly reflecting the variable cost of transport between hubs," according to the report.

"Prices in the Rockies and Lower Midcontinent producing regions rose closer to the Henry Hub in 2010 as increased takeaway capacity to higher-priced markets lifted local prices. The difference between natural gas prices in the Northeast and the Henry Hub fell as increased local production and pipeline capacity gave the Northeast more options to obtain natural gas."

Completion of the Rockies Express Pipeline last year displaced gas from Western Canada and, to a lesser extent, the Gulf Coast, according to FERC, which said gas from the United States "is now being regularly exported to Canada via backhaul." U.S. pipelines at most risk for displacement include those flowing Midcontinent and Gulf Coast production to the Northeast and the TransCanada pipeline system into the Northeast, according to the report.

Overall domestic demand increased 3.7% in 2010, driven by the economic recovery, which boosted industrial demand 4%, and by strong growth in the power sector. But there was virtually no growth in residential and commercial consumption, according to the report.

Gas prices were up about 12% in 2010 compared with 2009 prices but remained well below the levels of previous years, according to the report. At the same time, storage levels were high for much of the year, reaching record highs in November.

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