Marcellus Gas Production Affecting Local Gas Prices

Natural gas prices have emerged from the $2-$3/MMBtu lows of 2011 and 2012 to stabilize above $4/MMBtu.  National pricing is generally based on the Henry Hub, a natural gas pipeline distribution hub located in Erath, Louisiana, which connects to four intrastate and nine interstate pipelines supplying major markets throughout the United States.  The Henry Hub is used as a pricing point for natural gas futures trading on the New York Mercantile Exchange and is widely considered the benchmark price.  The current Henry Hub spot price is $4.79/MMBtu.

Locally, the story is quite a bit different.  A recently released report by the U.S. Energy Information Administration (EIA) stated that Marcellus natural gas production is outpacing the region’s pipeline takeaway capacity, placing downward pressure on local prices.  At Leidy Hub in central Pennsylvania, the average price this winter was $1.08/MMBtu less than the Henry Hub, a result of Marcellus production.  Closer to Washington, Pennsylvania, lower prices also found their way to the TCO Appalachia hub, where spot prices began trading below the Henry Hub beginning November 1, 2013.  The Dominion South hub in southwestern Pennsylvania also is reflecting pricing lower than the benchmark Henry Hub.

More pricing pressure will likely result from available supply that has yet to flow; a February 28, 2014 report from Barclay’s estimated that there are 1,300 drilled and uncompleted wells in the Marcellus region.

Several new proposed and recently completed projects will assist to increase pipeline capacity in the region.  Other projects like the proposed $3.8 billion investment at Dominion Resources’ existing Cove Point liquefied natural gas (LNG) terminal will convert what used to be an overseas LNG import terminal and retrofit the facility to be an export terminal, opening world markets to Pennsylvania Shale gas.  This facility, located 320 miles south of Susquehanna County, is already connected to the same pipelines that Marcellus gas is fed into.  The last import of LNG occurred at the facility in 2011.

For the Marcellus to stay an economical play, many factors will influence the development.  Increased transportation infrastructure along with expanding natural gas uses and markets should serve to benefit producers and our region as a whole.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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