On Air Now

Upcoming Shows

Program Schedule »

Listen

Listen Live Now » 1360 AM Northeast, WI 97.5 FM Green Bay, WI

Weather

Current Conditions(Green Bay,WI 54303)

More Weather »
37° Feels Like: 32°
Wind: N 6 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Tonight

Partly Cloudy 29°

Tomorrow

Partly Cloudy 49°

Sat Night

Partly Cloudy 30°

Alerts

Analysis: Waking giant-Marcellus Shale bullies U.S. gas market

By Eileen Houlihan and Edward McAllister

NEW YORK (Reuters) - U.S. natural gas prices escaped a rout this summer as record heat helped reduce towering inventory levels. This winter, fierce cold will be needed to help absorb the newest barrage of supply that will again test the limits of an over-supplied market.

Up to $3 billion worth of new pipelines connecting to the Marcellus Shale formation in the U.S. Northeast could unlock the equivalent of five percent of daily U.S. natural gas supply in the last months of this year and in 2013 that until now has been trapped without access to consuming markets.

The new lines are another sign of how prolific new production continues to transform the U.S. gas market nearly five years after drillers began to aggressively tap shale deposits, presenting a fresh challenge for a network whose demand is struggling to keep up with supply.

New output, which will depend on how willing producers are to send more gas to market, will make the Northeast much less reliant on gas from the Gulf and Canada as well as the Rockies, potentially altering flows of gas and changing the spreads between next-day gas prices in different regions such as New York and the national benchmark Henry Hub in Louisiana.

Output from the Marcellus - a rich seam of gas-bearing rock that straddles Pennsylvania, New York, Ohio and West Virginia - has jumped nearly ten fold since 2009, flooding pipelines and playing a central role in pushing futures prices to ten-year lows earlier this year.

But only now is the Marcellus beginning to realize its full potential. It's a bearish signal for both day- and month-ahead gas prices and could threaten the profitability of producing gas for companies like Chesapeake Energy , Statoil and Anadarko Petroleum Corp .

About ten projects coming online in the next three months alone will add an extra 3 billion cubic feet per day (bcfd) of pipeline capacity, according to government data. Another 5 bcfd of projects are in the works for 2013, at least.

Barclays analysts see an additional 1.8 bcfd flowing from the Marcellus by the end of 2012 and an additional 3.4 bcfd in 2013, together adding about 8 percent to the 65 bcfd of total U.S. output, according to a recent report.

"Historically, pipelines were built to move gas from West to East, but now the production increase is in the East. There will certainly be displacements of gas with these new pipelines," said Anthony Yuen, analyst with Citigroup in New York.

SWITCHING FLOWS

Rocketing output from Marcellus is forcing pipeline operators to rethink plans, as the Northeast, a high-paying market due to its cold winters and hot summers, becomes increasingly self-reliant.

Williams Cos , owner of the Transco pipeline which ships gas from the Gulf Coast to the Northeast, is expanding pipeline capacity out of the Marcellus to provide additional flows along its system to meet demand on the Eastern seaboard, the company's chief executive Alan Armstrong said in an interview.

This will involve reversing some infrastructure to allow for southbound flows.

Williams has plans for a network of pipes that by 2015 will ship gas from the Marcellus to New York City, Long Island and areas further south in Maryland and Virginia, according to a recent report on the company's website.

"The system is not designed to backflow and we are spending some money as part of that project that will allow us to flow gas back past that point," said Armstrong, referring to a processing unit on the Pennsylvania-Maryland border.

Kinder Morgan's Rockies Express (REX) pipeline, which came online in 2004, was seen as a much needed vein running from rich gas deposits in the West to needy markets in the East. But flows to Ohio along REX have shrunk over the past year, analysts said, a trend they expect to continue.

Gas prices across the country have converged as new production comes online, thinning the margins for parties transporting gas across the country. Pipeline operators and shippers are already having to find more lucrative markets for their gas, such as California, where prices are currently the highest in the country due to late summer heat.

Northeast gas prices, historically prone to winter spikes, have seen some pressure from increased supply in the Marcellus. Last winter saw the tamest price leap in recent years, in part due to mild weather.

Prices between the New York citygate and Henry Hub, the nation's benchmark supply point, have run hand in hand over the past few months, with New York trading only 15 cents more than the Hub this summer, the smallest gap in more than a decade.

Price points closer to the Marcellus, which have been lower than Henry Hub due to supply constraints, have also showed signs of convergence.

Phil Flynn, analyst with Price Futures Group in Chicago, expects gas futures prices to again fall to $2 per mmBtu and cash prices in the Northeast to "rival last year's lows", especially if we see another mild winter.

Henry Hub cash prices bottomed out at a 10-year low of $1.82 per mmBtu in late April, while New York citygate prices also fell below $2 in late April, their lowest level since 2001.

Flynn said the biggest contributing factors to the expected drop off in prices are the new pipelines and the currently non-producing wells these pipelines will make accessible for natural gas extraction.

Similarly, Canadian flows from the north could be restricted, given increased Northeast supply.

A recent Bentek Energy analyst report showed gas from Marcellus, particularly Northeast Pennsylvania, is poised to displace 0.4 bcf per day that has traditionally been imported from Dawn, a price point on the eastern Canada-U.S. border where gas traditionally has flowed from north to south.

WAITING WELLS

More than 1,000 drilled wells are waiting to be hooked up to pipelines in the Marcellus - about 700 above the norm - thanks to a busy drilling program in the region since 2009 that ran ahead of the infrastructure needed to move the gas to market, including pipelines, processing facilities and compressor stations.

While most companies have cut the number of rigs drilling there since gas prices slumped to ten-year lows earlier this year, these existing wells are expected to keep production flows strong for some time.

However, the actual output along the new pipelines will depend on when, and how quickly, producers decide to bring the new wells online.

Statoil has about 400 wells that are waiting for new pipelines, the company said at the release of its second quarter financial results. Anadarko has about 200 and Range Resources and Penn Virginia about 50 each, according to recent company calls with analysts.

Not all these wells will start producing at once and the prospects for the Marcellus depends on how willing producers are to bring new cheap gas to market. And they remain cautious, after tumbling gas prices crimped profits this year.

Anadarko said it plans to bring about 20 to 30 wells online per quarter, which could increase if the gas price rises.

"It is highly dependent on how many wells are ready to be completed and the operators' planned schedule for bringing those wells on line," said Randall Collum, analyst at Genscape in Houston, who estimates there will be between 0.5 bcfd and 1 bcfd of extra flows from the Marcellus this year and 1.5 bcfd next.

"I don't think producers will bring on those wells at once unless they want to see really low prices," said Collum.

Still, even more conservative estimates for supply growth show strong output. Citi analysts see up to 2.4 bcfd of additional production if all the 1,000-odd wells came online over the next 12 months. That alone is an additional 3.5 percent of daily supply.

"Some people are not expecting all of this capacity to come on line. The argument is just because they have pipelines doesn't mean they will produce it. But I tend to disagree and think it will be more like the movie, 'If they build it, it will come.' and we're going to be flooded by supply," said Flynn of Price Futures Group.

(Reporting by Edward McAllister and Eileen Houlihan; Editing by Tim Dobbyn)

Comments