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Marcellus Price Gap Widens Further as Production Booms

Price divergence in Tennessee Gas Pipeline's Zone 4 in northeastern Pennsylvania is one of those things that gets worse before it gets better.

With Marcellus Shale natural gas production flooding the market, the gap between prices on Lines 200 and 300 of Tennessee Gas Pipeline's (TGP) that began in July has widened into a chasm with Line 200 in Zone 4 coming up with a respectable $3.69/MMBtu average in October, while prices on Line 300 in Zone 4 -- right in the heart of Marcellus production -- were playing in a different park with a $1.49/MMBtu average.(see Shale Daily, July 21).

Last month the Federal Energy Regulatory Commission highlighted just how much gas is coming out of the Marcellus Shale (see Shale Daily, Oct. 21). According to a Winter 2011-12 Energy Market Assessment released by FERC's Office of Enforcement, "Marcellus Shale production has increased from 2.7 Bcf/d to 4.7 Bcf/d in the past year alone. 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 [area], the lowest in the country."

It's not just the difference in averages on the two lines. From Sept. 30 through Oct. 31 prices on Tennessee's Line 200 in Zone 4 have averaged $3.69/MMBtu and gotten as high as $3.89 and as low as $3.49, according to NGI's Daily Gas Price Index. However, on Line 300 in Zone 4, gas has traded in much wider -- and lower -- ranges: on the Oct. 24 trade date as low as 60 cents/MMBtu and as high as $3.73 with an average of 89 cents. The extremes came in 47 transactions covering 217,000 MMBtu.

The low end of NGI's Tennessee Zone 4 Line 300 index has fallen below $1 every day since the Oct. 19 trading session. To better reflect the realities of the northeastern Pennsylvania market, NGI is modifying its price indexes.

"Marcellus production from northeastern Pennsylvania -- mainly Susquehanna, Bradford and Tioga counties -- has really saturated the market and created quite the capacity bottleneck on Tennessee Line 300 in the area," said Patrick Rau, an NGI analyst. "While there are projects currently under way to alleviate the constraint, it's likely going to be well into next year before any real change in the situation occurs. Of course, if Marcellus production continues to grow at a rapid pace, then system tightness could be prolonged."

Rau noted that Susquehanna, Bradford and Tioga counties accounted for 60% of Pennsylvania's Marcellus natural gas production during the first half of 2011.

To keep up with the expanding production and diverging prices NGI is expanding its price quotes. NGI's "NE PA: Tenn" index will cover trades east of Station 313 in Potter County, up to and including Station 321 in Susquehanna County. Another index will cover all other trades in the Marcellus of northeastern Pennsylvania. A third index will be a weighted average of the first two and will be equivalent to the Northeast Pennsylvania index that is regularly published in NGI's Shale Daily.

One trader said he thought the new northeast Pennsylvania index would be useful as "it's where most Marcellus gas tries to crowd aboard Tennessee, even though lesser amounts can enter on either side of the segment. More producers have to offer lower prices between 315 and 321 to sell to somebody with necessary pipe capacity to move the gas to market."

Gordon Pickering, director of energy for Navigant Consulting, said the evolution of the region around TGP's Line 300 from a market area to a supply area is "a natural development."

The next shoe to drop will be increased demand. As gas continues to be competitive with coal as a power generation fuel, additional gas-fired generation will soak up some of the Marcellus gas, Pickering said.

"If you look at the futures market going forward, at least through 2013, gas is apt to continue to be lower [priced] than coal in the Appalachian area [and] in the Northeast area. More switching is apt to happen, so the region will be a consuming region and even a larger consuming region."

Additionally, the years ahead could see more gas transportation infrastructure built to get Marcellus gas deeper into New York City megalopolis. "That is a real challenge for the industry and has been and maybe will continue to be one that's just too hard to overcome in the medium term," Pickering said. "In the meantime there are other areas that seem to be more obvious in terms of trying to absorb some of the Marcellus production: north into Canada perhaps and in the Southeastern United States it looks like through existing long-haul pipelines or at least through a portion of those lines."

While NGI's price indexes are changing to reflect the evolving Marcellus supply/market area, numerous pipeline projects are proposed and under way to address the underlying constraint situation in the Marcellus.

Although Laser Northeast Gathering Co. LLC's recent pipeline project went online last week, adding capacity from northeastern Pennsylvania, it hasn't lent much support to prices in the region. More capacity from other projects is on the way, though.

Nearly 1.0 Bcf/d of Marcellus takeaway capacity is scheduled to come online in the next month as a result of El Paso Corp.'s Tennessee Gas 300 Line Expansion project (see Shale Daily, Oct. 10), Empire Pipeline Inc.'s Tioga Line Extension and National Fuel's Line N expansion project in southwestern Pennsylvania, according to Bentek Energy LLC. The firm has said new capacity slated to come online in Line 300 will fill up quickly (see Shale Daily, Sept. 27).

In addition, Equitrans LP, a subsidiary of Pittsburgh-based EQT Corp., recently received approval from FERC to begin construction on a new pipeline in Pennsylvania and West Virginia that will provide additional takeaway capacity for Marcellus producers (see Shale Daily, Sept. 23). The $272 million Sunrise project, which would expand Equitrans' existing mainline system, is targeted for in-service in the summer of 2012.

But with only 1.0 Bcf/d of the total incremental capacity from those projects expected to reach New York City by 2013, Bentek said it expects the market to remain constrained and New York citygate prices to continue trading at a premium to other Northeast hubs this winter and in the winter of 2012-2013.

The project slate of Tennessee is the most robust.

El Paso's TGP is investing about $1.3 billion in four projects to enable transport of an additional 1.5 Bcf/d of gas into key Northeast U.S. markets when the projects are placed into service by the end of 2013.

Production from Marcellus drilling currently accounts for about 1.5 Bcf/d of inflows into El Paso's existing pipeline systems in the region. TGP currently has a design capacity of 7 Bcf/d and 93 Bcf of storage capacity.

Tennessee's 300 Line Project was proposed after Equitable Energy expressed interest in transporting gas from West Virginia and Kentucky and is designed to move gas from Appalachia as well as as the Gulf Coast and the Rockies. Potentially, it also could benefit those companies that produce gas from the Marcellus Shale that are in need of commercial markets for their gas.

The 300 Line Project involves the installation of eight looping segments in Pennsylvania and New Jersey, totaling approximately 127 miles of 30-inch diameter pipeline, and the addition of approximately 55,000 hp following the installation of two new compressor stations and upgrades at seven existing compressor stations.

It is expected to be in service Nov. 1.

Tennessee's proposed Northeast Supply Diversification (NSD) project resulted from subsequent customer interest in TGP's other Northeast projects. The pipeline said it has shipper agreements with Cabot Oil & Gas Corp., Anadarko Energy Services Co. and Seneca Resources Corp. The project involves installation of seven miles of 30-inch diameter pipeline looping in Bradford and Tioga counties, PA, west of Tennessee's Station 317; other facility modifications in Niagara and Erie counties, NY, and utilization of existing and third-party pipeline capacity. NSD would increase capacity in the region by about 250,000 Dth/d. The FERC-certificated project is expected to be in service during November 2012.

The pipeline's proposed Northeast Upgrade Project is a smaller project than the 300 Line Project. Its customers are Chesapeake Energy Marketing Inc. and Statoil Natural Gas LLC. The project is an extension of Tennessee's 200 and 300 Line systems in the heart of the Marcellus Shale and involves construction of 37 miles of looping pipeline in five loops and modification of four compressor stations to provide about 636,000 Dth/d of capacity. A decision on the project is expected from the Federal Energy Regulatory Commission in February. The project could be in service during November 2013.

The proposed MPP Project would provide about 240,000 Dth/d of incremental firm capacity from the region along the existing Line 300 to serve established markets, including those in the Northeast, the pipeline said. Customers are Chesapeake Energy Corp. and Southwestern Energy Co. The project includes installation of 7.9 miles of 30-inch diameter pipeline in Potter County, PA. Also planned are modifications and upgrades at four compressor stations on the Line 300 located in Mercer, Venango, McKean and Potter counties.

The MPP Project is a complement to the 300 Line Project, Northeast Upgrade Project and the NSD project. FERC approval has been requested by the third quarter of 2012; the project could be in service during November 2013.

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