Energy needs of the Northeast U.S. are expected to grow over the next few years, but the production growth of Marcellus-Utica play is expected to grow more. Bradley Olsen of Tudor, Pickering, Holt & Co. (TPH), told Hart Energy’s MUM conference that “Marcellus-Utica increases total U.S. gas supply by 15 Bcf (billion cubic feet per day) or 30% by 2020.”

A graph in his presentation illustrated his point. The Northeast has a production rate of 11Bcf per day and by the end of 2014, will be able to supply the northeast with 60% of its needs. If the growth that TPH predicts holds true, than the region will supply 97% of its own energy needs by the end of 2017 and will become an exporter.

While the Northeast is expected to see continued growth, TPH predicts that growth in other markets will remain flat. This throws a curve in the historical trend that has been in place in which the northeast is necessarily an importer and not
an exporter.

“TPH as a firm holds the view that between now and 2016, while we are waiting for this infrastructure to come online, we are going to see turbulent differentials,” Olsen said.

With the surplus of gas that will be available in the Northeast, there is going to need to be a reliable way to get it out and into other markets. Currently, and during the past few years, there has been a flurry of activity to build gathering systems, but there is a need to look at more long-haul pipelines and other modes of transportation to move
the product out of the Northeast and to other markets.

“We think that we are going to see a much bigger focus on long-haul infrastructure and potentially you are going to see
gathering and processing players get more integrated into the downstream long-haul pipeline infrastructure, rail infrastructure and, in some cases, waterborne exports,” Olsen said.

“Clearly there are going to be price implications of this infrastructure bottleneck situation. We believe for the next three years, as we are in a period infrastructure shortage, the average discount from the gas market could reach $1 across the producing entity and, in fact, it sounds like a big discount, but it really is not so different from what the futures market
is telling you in several cases. Long term, we think the marginal cost of transportation of the Northeast will set the discount for gas compared to Henry Hub, which we expect to be about 40 to 50 cents.”

Since the Northeast will have excess gas it will need somewhere for it to go. When looking for a way out, there are several choices—the Midwest and the Chicago market, Florida and Canada. All are possibilities, but they won’t come without a cost.

The last option— and what Olsen called “the most important market” and possibly the most economically feasible of the
choices—is Texas-Louisiana.

“I know that most of you are probably thinking that the idea that Texas and Louisiana will need to import gas from the
Northeast was unheard of as recently as a year or two ago, and it sounds a little bit crazy even today, but what we are seeing is over 6 Bcf of pipeline projects are currently proposed or contracted to move gas from the Northeast to Louisiana and Texas,” he said.

His reasons behind the importance of Texas-Louisiana are threefold:
• Unparalleled industrial demand growth associated with petrochemical projects;
• Power generation growth and coal to gas; and
• The biggest factor: LNG. Investors need to start looking at the bigger picture, he said.

“We think that capital toward long-haul projects or export projects—whether it be LPG exports, LNG export long-haul pipelines to Canada or long-haul pipelines to the Gulf Coast—we think it is going to be a lot easier for investors to put capital towards those projects because there is much more visibility versus maybe a smaller project that doesn’t have visibility into how to get the product all the way to the end user.”

He ended by saying that the end-user may be “across an ocean or maybe across the Gulf of Mexico.”

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