The US Northeast has traditionally been saddled with some of the country’s highest natural gas prices. But with production growth in the region exceeding expectations, a resulting gas glut could push regional prices down below those at other trading points around the US, according to Barclays.
Barclays data shows that output from the Marcellus shale, which spans several eastern US states, rose by 2.1 billion cubic feet per day in the first six months of 2013, a large increase over the 1.5 bcf/d growth in the same period of last year.
Recent unconventional well production data from the Pennsylvania Department of Environmental Protection showed that production in the state exceeded 1.4 trillion cubic feet in the first six months of the year, compared to similar data for the same period of 2012 showing total combined production at well under 1 tcf. A large share of ongoing Marcellus production comes from Pennsylvania, and the state also holds a large swath of the overlapping Utica shale.
Meanwhile, oilfield services firm Baker Hughes’ weekly rig count shows that rigs active in the Marcellus as of August 16, 2013 had declined by 7% from year-ago levels. The Energy Information Administration noted in March that Pennsylvania’s gas output rose by 69% in 2012 “in spite of a significant drop in the number of new natural gas wells started during the year”.
The number of rigs active in the Utica, in contrast, had risen to 38 as of August 16 from 23 a year ago. In some cases, production from the Marcellus and Utica shales is combined in reporting, according to Barclays.
The bank expects production from the Marcellus and Utica to growth by 3.6 billion cubic feet per day this year and 3.3 bcf/d next year, and anticipates that on an annual basis, output may surpass regional demand next year. And growing production from the Marcellus has already upended the traditional relationship between natural gas prices at some Northeastern trading locations and those at the Henry Hub.
“Natural gas at the TCO [Columbia Gas Transmission Corp] Appalachia index has historically been priced about $0.25 per million British thermal units (MMBtu) above Henry Hub…however, the spread between these two points in spot markets reflects rough parity now, and in forward markets TCO is priced less than at the Henry Hub,” the EIA said in a daily update in July of last year.
If production continues to outpace consumption growth, that discount could deepen. Barclays noted that production in the Northeast may have already outpaced regional demand this past spring, and while strong heating demand in winter is likely to reverse that relationship this year, “storage capacity may be sufficient to cover the seasonal deficit by the next withdrawal season”, the bank said.
“Discounts could deepen and become more widespread as the continued growth of production will struggle to be matched by a commensurate increase in regional demand in the next three to five years,” Barclays said. “Northeast gas will have to flow out of the region, and we expect Northeast prices to be increasingly discounted, not only relative to Henry Hub, but also to the Midcontinent and western markets.”
