Amid a backdrop of falling gas rig counts and flat gas production in North America, a Bernstein Research report concludes that the Marcellus shale will continue to be the brightest star.

The report states that the Marcellus is the “single biggest element” in the gas market, meaning it’s the dominant force in the North American market. More specifically, what’s “big” about the Marcellus are its recent production results and an impressive forecast for the future. As of mid-2013, the Marcellus produced about 8 Bcf per day, compared with about 6 Bcf per day in mid-2012, according to Bernstein. Looking ahead, production is expected to swell to 18 Bcf per day by 2020.

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

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

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

In 2009-10, things began to change. The spread dropped to $1.01 as the new Rockies Express Pipeline offered new capacity and the Marcellus began to ramp up. In 2011-12, 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 there is low demand during the fall shoulder months.

“We estimate that the long-term differential of Marcellus gas to Henry hub would be 25 cents per MMcf, which would obviously be added to the effective marginal cost,” said Brackett. “This would benefit producers in Arkansas and Louisiana.”

In the medium term, 2014-2016, Bernstein expects a $4 per MMcf price deck. Bernstein bases the $4 price on a stable average residential and commercial power demand. In the longer term, 2017-2020, Bernstein expects modest growth in power demands but significant growth from LNG exports, particularly to Mexico.

With the increased export demands, Bernstein thinks Henry hub prices will hit the $5 per MMcf range.

Comments