Not until basis differentials reach a 48% discount to the New York Mercantile Exchange (Nymex), or about $2.10/MMBtu based on the curve, does Northeast natural gas become uneconomic, according to an analysis by Credit Suisse.
"As this is the point at which we begin to get worried about Marcellus Shale supply growth, we think this puts a floor under Northeast basis," analysts said in a report Tuesday. Power demand could soften differentials, but the potential of 1.5 Bcf/d of coal-to-gas switching wouldn't be enough, they said.
But in any scenario, could gas prices fall below a $2.00/MMBtu floor in the Northeast? It's possible, said the analysts, if liquids-rich production began to supply most of the growth, or if there were infrastructure project delays by the Federal Energy Regulatory Commission. However, they think even with the excess gas output, Nymex prices would need to move much lower before activity would slow in the dry gas areas.
"Under our current assumption of a 3% basis discount, the Marcellus northeastern core continues to remain economic at $2.10/Mcf, while at a 33% basis discount the play remains economic at $3.00/Mcf versus the 2014 and 2015 strip prices of $3.89/Mcf and $4.04/Mcf, respectively."
Credit Suisse surveyed all announced or planned infrastructure projects to send Northeast gas north, west and south. What analysts determined was that not enough expansions are being readied. Models indicate that Marcellus output could increase by roughly 5.3 Bcf/d in the next three years, with an estimated 2.4 Bcf/d from the Utica Shale. And those are conservative estimates, "given the very promising, newest well results."
Dry wells drive about 70% of Marcellus production, which in four years has topped 13 Bcf/d, or 20% of U.S. output. "The wet or very rich wells spin off so much natural gas liquids that they would flow even if gas prices fell below $1.00/MMBtu and yield the other 30% of the Marcellus gas flows," said analysts.
Credit Suisse now estimates total Northeast production to hit 20 Bcf/d as soon as 2016, with at least another 5.3 Bcf/d growth over the next three years from the Marcellus only. Other energy analysts have calculated output would hit the 20 Bcf/d mark by 2020.
"From production levels of 13 Bcf/d today, this would place Marcellus just over 18 Bcf/d by 2016. Given that we have assumed production activities (number of wells/rig) remain constant, we view this as a conservative estimate...While type curves and well data for the Utica are still sparse today, we estimate growth of 2.4 Bcf/d through 2016. Starting from 0.5 Bcf/d at the end of 2013, midstream infrastructure has aggressively developed within the southeast Ohio region and should allow for this type of growth, in our forecasts."
That island of gas in the Northeast is rising just as a "similarly impressive demand island is forming the southern half of the U.S." Credit Suisse said. Using a bottom-up approach, including the expected moving parts in the power, industrial and liquefied natural gas export sectors, analysts concluded that through 2016, total demand growth among regions to be connected with Marcellus/Utica gas is forecast to be 5.3 Bcf/d in the the 2015-2016 timeframe, as a lot of coal-fired generation is retired. Meanwhile, 80%, or 4.2 Bcf/d, of demand growth is forecast to be located within the Southwest and Southeast power regions.
The largest contributor to southern U.S. gas demand by 2016 would come from liquefied natural gas exports, according to Credit Suisse. Also contributing would be growth for gas-intensive industrial projects. Another 1.1 Bcf/d of total demand growth would be created "equally" in the Midwest and the Northeast by then.
However, in the analysis of announced pipeline projects to carry Northeast gas to southern markets, Credit Suisse found there would be a capacity shortfall of 1.6 Bcf/d by 2016, opening the door for more redirection of gas flows. An estimated $40 billion of midstream infrastructure now is planned in the Appalachian Basin (see Shale Daily, Oct. 25).