Those who follow the North American gas market could surely stand a bit of positive news. The rig count is down, production is flat, and prices aren't anything to brag about. Yet, a dash of sunlight can be found among the gassy shales, according to a Bernstein Research report.

Released in late September, the report states that the Marcellus is the “single biggest element” in the gas market. What's “big” about the Marcellus are its recent production results and an impressive forecast for the future.

According to the US Energy Information Administration, gas production in Pennsylvania, the hub of Marcellus activity, rose 69% to 6.1 billion cubic feet (Bcf) per day in 2012, even after a “significant drop” in the number of new natural gas wells started during the year.

The EIA attributes the play's recent growth, and rosy forecast, mostly to new infrastructure in Pennsylvania and West Virginia. “As infrastructure expanded, wells were gradually connected to pipelines, sustaining natural gas production increased through 2012 despite a decline in new natural gas well starts,” the EIA said in a statement earlier this year.

In July 2012, Equitrans Midstream Partners placed its Sunrise Project into full service. According to the EIA, the project has capacity to carry .31 Bcf per day from Wetzel County, West Virginia, to Greene County, Pennsylvania. Sunrise also provides access to five separate interconnections serving mid-Atlantic consumers. A few months later, the company also placed into service its new 20-Bcf-per-day Blacksville Compressor Station in Monongalia County, West Virginia.

In September 2012, Dominion Transmission initiated service from its Appalachian Gateway Project, which includes four new compressor stations and 110 miles of new pipeline. The project can handle .47 Bcf per day from production areas in West Virginia and southern Pennsylvania to interconnect with the Texas Eastern Transmission Pipeline.

These three projects expanded the production capacity in West Virginia and southern Pennsylvania by almost 1 billion cubic feet.

Producers have gravitated toward the more profitable, liquids-rich portion of the Marcellus in southern Pennsylvania and West Virginia, but production in the dry-gas region has also seen increases as a result of the new infrastructure. In the dry region of southern Pennsylvania, production doubled from .86 Bcf per day through July 2012 to 1.73 Bcf per day through July 2013, according to the EIA.

The expected Marcellus growth in coming years will have significant impacts on gas markets in the short, medium and long terms, according to Bernstein. Midstream capacity in the Northeast will be sufficient in the near-to-medium term, “but there are likely to be ongoing blowouts and volatility as pipelines continuously rush to catch up to the needs of production,” says Bob Brackett, senior Bernstein analyst.

According to Brackett, Northeast gas demand is highly seasonal. It hovers at less than 9 Bcf per day in the shoulder months and nearly 20 Bcf per day in the winter. If the Marcellus hits high-case targets of 12 Bcf per day during the next two to three years, additional distribution capacity would be required.

“The most likely resolution will be one or more of the major incoming pipelines reversing direction, sending Marcellus gas either toward the Midwest or south toward the mid-Atlantic,” he says.

For now, the Northeast is still a net importer of gas from Henry Hub and the Rockies. But, “as the Marcellus continues to grow, this will no longer be the case, and additional outlets for the Marcellus gas may even be needed,” Brackett says.

Until the past five years, the Northeast relied heavily on gas from Western Canada and Henry Hub. The price in New York was on average $1.19 higher than Henry Hub, reflecting the cost to transport natural gas to market.

Things began to change in 2009-2010. The spread dropped to $1.01 as the new Rockies Express Pipeline offered capacity and the Marcellus began to ramp up. In 2011-2012 the spread fell further to 76 cents, reflecting the increased volumes. In recent months the spread has hovered just above zero as more Marcellus supply has come online and demand has dropped during the fall shoulder months.

“We estimate that the long-term differential of Marcellus gas to Henry Hub would be 25 cents per million cubic feet, which would obviously be added to the effective marginal cost,” Brackett says. “This would benefit producers in Arkansas and Louis iana.”

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