Being closer to a major market area means cheaper transport, right? Marcellus Shale producers are benefiting from that self-evident axiom, but there is some question about their relative lack of gathering/processing infrastructure compared to such areas as the Gulf Coast and Midcontinent hindering them from realizing maximum value for their gas.

Referring to recent producer talk about shutting in with gas priced below $4, Canacord Genuity analyst Cameron Horwitz said that for the most part, "they would likely do so on conventional wells that have elevated cash operating costs" before considering following suit with shale assets. "I believe it would take sub-$3 gas prices to see producers shut in marginal shale wells, given that cash costs are relatively low for these plays. As an aside, unless we see further acute weakness in gas prices, I think most of the market talk will surround reducing capital expenditures for incremental shale drilling rather than shutting in existing wells."

Horwitz said the close proximity to premium prices in the Northeast and consequent lower transportation expense "in conjunction with a highly capital-productive asset" give Marcellus Shale operators a decisive advantage over other more distant producers.

The impact of rising Marcellus Shale output has been mixed but relatively moderate on Appalachia-Northeast basis. The spread between Dominion (one of the pipes with the largest exposure to Marcellus production) and Transco's Zone 6-New York pool (representing a primary market area for the gas) was more than a dollar as of the pre-Thanksgiving trade date of Nov. 26, 2008 ($6.84 and $7.91, respectively). Yet in June 10, 2009 business the points were separated by only a dime ($3.79/$3.89) and since then haven't been more than 20-30 cents apart except in a few periods of extreme market conditions.

Meanwhile the Dominion differential to Texas Eastern also bulged way beyond normal occasionally in those extreme market conditions mentioned above, but generally has been in the range of 10-30 cents (or less in a few instances) since late 2008. As of last Friday both market areas sported modest premiums of 15 cents (Texas Eastern M-3) and 16 cents (Transco Zone 6-New York) to Dominion's average of $3.76.