The Northeast’s need for new midstream infrastructure is growing along with production even as drilling in the Marcellus and in the Utica decreases. Producers and operators originally anticipated that these two plays would feed demand in the Northeast, which would require smaller amounts of new infrastructure projects.

However, it is now believed that Northeast production outpaced local demand for the first time last spring. This will require additional outlets to other markets to be developed to prevent potential gluts to be formed in the local market.

According to a recent edition of Barclays Capital’s Gas and Power Kaleidoscope, consumption for states north of Virginia and east of Ohio (including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and the District of Columbia), averaged 10 billion cubic feet (Bcf) per day from April 2009 to 2011. The production output crossed this 10 Bcf per-day threshold last April.

Meanwhile, gas production out of the region is expected to increase by 3.6 Bcf per day this year and an additional 3.3 Bcf per day in 2014, according to the report.

“Our projections for production growth suggest that Marcellus/Utica output may surpass Northeast demand in 2014 on an annual average basis,” the report said. “The strong seasonality of consumptions means that the region’s needs are likely to exceed production during peak demand in the upcoming winter. However, storage capacity may be sufficient to cover the seasonal deficit by the next withdrawal season.”

As of 2012, there were 107 rigs in the Marcellus, but this has decreased to just 78 working rigs at this time, according to Baker Hughes. A sizable portion of these rigs are directed at holding acreage and will likely to be moved to other plays once these leases are maintained.

“This is particularly true for those with JV [joint venture] commitments in the region, who have a wide range of drilling targets outside of the Marcellus,” the report said.

The play’s production growth is attributed to improved production levels out of wells due to the implementation of better land targets, reduced cluster-spacing completions, longer laterals and more efficient fracturing designs that have led to both better efficiency and reduced drilling times.

Infrastructure bottlenecks have thus far kept pace with production growth out of the Northeast, but these will begin to be alleviated in the next year-and-a-half, according to Barclays Capital.

In 2012, pipeline capacity grew by 3.2 Bcf per day. This is expected to grow by 2.7 Bcf per day this year, with another 1.4 Bcf per day scheduled to come online in 2014. The bulk of this new infrastructure will increase capacity for dry gas out of the region.

Wet-gas transportation capacity will be increased as new gas-processing capacity is added along with new ethane takeaway capacity. Combined, this new infrastructure will enable an additional 3.5 Bcf per day of wet gas to be transported out of the Marcellus/Utica by the end of 2014.

The U.S. Energy Information Administration states that Northeast working natural gas storage capacity is 843 Bcf with a maximum daily deliverability of 19.5 Bcf per day. While storage demand is expected to increase to the point that it will be able to cover any seasonal deficit by 2015, this coming winter could see a potential glut if there isn’t strong heating demand from a cold season.

The sheer size of the amount of gas production out of the region has caused midstream companies to reverse or backhaul systems such as the Texas Eastern Transmission Pipeline, Columbia Gulf Transmission Pipeline and the Rockies Express Pipeline, that were previously used to import volumes into the Northeast.

Bentek reported that gas flows from Canada into the Northeast fell 30% in 2012 and 44% on a year-over-year basis while gas flows from the South and Midcontinent into the Northeast fell 24% in 2012 and are down 27% year-over-year.

This new market dynamic has resulted in some basis points to trade at negative differentials and these could deepen further, according to the report. “Northeast gas will have to flow out of the region, and we expect Northeast prices to be increasingly discounted, not only relative to Henry [Louisiana] Hub, but also to the Midcontinent and western markets,” the report said.

This price decrease has been aggravated by the lack of ethane capacity out of the region, but the near-term differential may fade in the coming months as new processing plants and ethane pipelines are brought online.

On a long-term basis, Barclays Capital anticipates the discounts to deepen and become more widespread as demand will fail to keep pace with an even further increase in production growth during the next three to five years.

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