Growing gas production from the Appalachian Basin's Marcellus Shale will disrupt regional gas flow patterns and force Northeast gas prices downward, Bentek Energy LLC said in a new Market Alert. The firm predicted that Appalachian Basin production will range 4-6 Bcf/d by 2014 and that "the superior drilling economics of the Marcellus will allow Marcellus production to grow and will force production from other supply areas to shrink, leading to a major shift in U.S. gas flows and prices."

The gas market has been transformed in the last three years by tremendous growth in shale gas production and the addition of west-to-east pipeline capacity to move that gas to market [see NGI, Aug. 3, 2009; May 18, 2009], said Rusty Braziel, Bentek managing director. "Recent pipeline projects such as the Rockies Express, Gulf Crossing, Midcontinent Express and others have helped alleviate the long-standing pipeline capacity constraints and have worked to reduce price differentials by increasing relative prices in the West while reducing prices in eastern markets."

Put another way, for the gas industry it's all connected now as "all the major U.S. producing basins are now functionally included in the same supply area," Bentek said in its report.

"Now the Marcellus -- the 'Beast in the East' -- is poised to create further market disruptions as natural gas production from the Appalachian Basin expands from 2.2 Bcf/d last year to somewhere between 4 [Bcf/d] and 6 Bcf/d by 2014. More than 30 gas pipeline expansion projects have been announced to support this growth in the Northeast, representing the addition of more than 12 Bcf/d of new gathering, short-haul and long-haul pipeline transportation capacity and pipeline interconnections in the region."

Enbridge Inc. recently announced plans for a pipeline to ship natural gas liquids from the Marcellus to Chicago. Tenaska Midstream Services is partnering on a gathering line to serve the Marcellus region (see NGI, March 22). An open season on Williams' Transco pipeline for capacity from the Marcellus ended last Friday.

Statoil U.S. subsidiary Statoil Natural Gas recently completed agreements with El Paso Corp.'s Tennessee Gas Pipeline and Spectra Energy Corp.'s Texas Eastern Transmission that will allow it to transport up to 200 MMcf/d directly from the northern Marcellus production area to New York City and the surrounding areas (see NGI, March 8). And Millennium Pipeline Co. LLC recently completed an open season for an expansion that would carry Marcellus gas to New York City's Manhattan borough (see NGI, Jan. 25).

And recently a small gas marketing business in New York and Pennsylvania stepped up efforts to promote Marcellus gas to the region as an alternative to long-haul pipeline gas from the Gulf Coast (see NGI, Feb. 22).

Last December Marcellus producer Range Resources Corp. said the third phase of a gas processing expansion program had been completed, adding 120 MMcf/d of cryogenic processing capacity. The increased ability to process the rich Marcellus gas from southwestern Pennsylvania would improve the company's netbacks, Range said (see NGI, Dec. 21, 2009).

"The problem is they're not keeping up [with the need for processing capacity]," Braziel said. "What that has meant is that basically budget dollars for Marcellus producers that have the option have moved to that northeast Pennsylvania region. That's the reason it's been growing so fast, and that's because it's relatively dry gas and generally does not require processing to remove liquids...From what we've seen in terms of the opportunity in the [southwestern] region [of Pennsylvania], no matter how much liquids capacity they add, the production in the area can probably continue to outgrow it."

Braziel noted that much of the transportation capacity development activity involves reversal of flow on existing pipelines. He also noted that Tennessee Gas Pipeline has been "very successful" with its backhaul program, which has the effect of bringing less gas from the Gulf into the Marcellus region, thereby relieving capacity constraints out of the Marcellus.

Even if only a few of the pipeline projects targeting the Marcellus are completed, the play's production is expected to displace traditional gas serving the Northeast -- from Canada, the Southeast/Gulf of Mexico, the Rocky Mountains and Midcontinent producing areas, Braziel said. "Gas flowing on long-haul pipeline transportation capacity into the Northeast from these traditional supply regions is expected to decline as Northeast utilities and end-users shift to Appalachian supplies."

According to Bentek's report, that story has been unfolding.

"Even though the premium Northeast continues to be the region with the highest basis spreads, basis in this area has weakened from plus $2.09 in winter 2007-08 to plus $1.70 last winter and plus $1.35 this winter to date (through February)," the report said. "Ohio basis also has been under downward pressure, dropping to plus 25 cents this winter from plus 37 cents last winter and plus 42 cents two winters ago."

Northeast price premiums -- one of the last bastions of relatively high prices -- are expected to shrink as multiple new pipelines relieve regional transportation constraints. Price spreads to the Northeast from Western Canada, the Rocky Mountains and the Southeast/Gulf are expected to tighten. "As a result, natural gas markets will be on a more level playing field from coast to coast," Braziel said.

Bentek isn't the only one to notice the looming impact of Marcellus production. At a recent industry conference in Houston a speaker from Haynesville Shale producer Chesapeake Energy Corp. predicted that output from the Marcellus will prevent much of the Louisiana play's output from reaching markets to the North (see NGI, March 15).

The first supplies to back out of the Northeast will likely be those from Canada, Braziel told NGI. "Canadian production has been falling off; the Canadian imports have been off over the course of the past year. Somebody's got to back out if the Marcellus is growing this much and it's probably Canada with higher-cost production...But then there's only about 1.4 Bcf [per day] that comes into that market, at least during the summer months, from Canada and so after there is some decline in Canadian imports, there is probably further decline coming in gas that's sourced either from the Gulf or the Midcontinent," he said. To the extent that it impacts gas that's coming from the Gulf, that certainly means that production increases coming from the Haynesville area will have a lot of competition on their hands."

Bentek's "Beast in the East" report said not only will there be an impact on U.S. markets, but international markets will feel the pinch as continued growth in domestic shale gas production can be expected to significantly reduce the need for Canadian and liquefied natural gas imports.

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