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

Mon Oct 15, 2012 12:28pm EDT
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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 (CHK.N: Quote), Statoil (STL.OL: Quote) and Anadarko Petroleum Corp (APC.N: Quote).

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.   Continued...

A natural gas well is drilled near Canton, in Bradford County, Pennsylvania January 8, 2012. Bradford County is currently ground zero for fracking the Marcellus shale in the Northeastern United States. REUTERS/Les Stone