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FERC: Shale Production Keeping Gas Prices Low

Natural gas production from the nation's shale plays now accounts for more than one-quarter of U.S. production, compared with 5% in 2007, and is helping to keep gas prices among the lowest in a decade, according to FERC's Office of Enforcement (OE).

"Marcellus Shale production has increased from 2.7 Bcf/d to 4.7 Bcf/d in the past year alone," according to a Winter 2011-12 Energy Market Assessment released by OE Thursday. "In Northeast Pennsylvania, where production is up 1.3 Bcf/d from 2010 levels, pipeline constraints have led to natural gas prices in the $2.00/MMBtu range, the lowest in the country. New expansion projects should help relieve constraints in the Marcellus producing region this winter, and stabilize prices in areas with high levels of constrained take-away capacity."

The average forward Henry Hub price for November through March is currently $3.87/MMBtu, Natural gas prices this year have remained among the lowest in a decade, OE's Omar Cabrales told the Federal Energy Regulatory Commission (FERC). "These price levels are due to record setting production, robust storage levels and pipeline projects that have allowed additional supplies to flow out of the production areas, helping moderate regional transportation constraints and get natural gas to markets," Cabrales said.

FERC's Office of Energy Projects estimates that 8.2 Bcf/d of pipeline capacity went into service in the first eight months of 2011, including El Paso Corp.'s Ruby Pipeline and TransCanada Corp.'s Bison Pipeline in the West, and Florida Gas Transmission's Phase VIII mainline expansion in the Southeast. And there are more than 6 Bcf/d of FERC-approved and proposed pipeline projects designed to provide additional takeaway capacity for Marcellus Shale gas, including El Paso Corp.'s Tennessee Gas 300 Line Expansion project (see Shale Daily, Oct. 10), the Empire Pipeline Inc.'s Tioga Line Extension (see Shale Daily, Nov. 10, 2010) and Dominion Transmission Inc.'s Appalachian Gateway (see Shale Daily, June 20), Cabrales said.

"Access to new production and added natural gas transportation capacity has contributed to a trend towards the convergence of prices between regional markets," Cabrales said. "During 2011 there were fewer incidences of spikes in basis between regional natural gas hubs and the Henry Hub benchmark price. This trend is expected to continue throughout the winter, as additional pipeline infrastructure comes into service and provides access to new low cost gas supplies."

Forward prices for winter natural gas are significantly higher in the Northeast than they were last year, "but overall forward prices remain at moderate levels," according to OE. In the rest of the country forward winter prices are relatively flat, except at the Northwest Sumas Hub, where lower demand for gas for power generation resulting from high hydropower output and the additional supply of Rockies gas via the Ruby Pipeline has pushed prices 15% below 2010 levels.

A significant portion of the production growth seen in 2011 has come from the nation's shale plays. "Shale gas now accounts for more than 25% of U.S. production, up from 5% in 2007," Cabrales said.

Storage levels, which are an important indicator of the industry's ability to meet winter demand, were 2% above the five-year average as of Oct. 7 and are expected to end the injection season near or above the record set last year, according to OE. Injections have been strong since August. "At the current injection rates, natural gas in storage should be sufficient to meet winter demand," Cabrales said.

Shale production's effect on gas prices is also having a significant impact on liquefied natural gas (LNG) exports. "Since the fall of 2007, U.S. prices have generally been at a substantial discount to world LNG prices, and LNG imports have tumbled," Cabrales said. "Current winter forward natural gas prices at Henry Hub are $6-8/MMBtu lower than comparable European prices." The eight active LNG terminals in the United States have operated at only 5% of capacity this year, according to OE.

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