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In the US northeast, more pipes and more gas

New infrastructure will unleash new supplies from the Marcellus and Utica. It could temper the recent price rally

It has been a rough couple of years for gas producers around the prolific Marcellus and Utica shale plays. The vast amount of supply brought into production has swamped the existing infrastructure network, depressing prices and forcing producers to keep gas in the ground. Billions of dollars in new pipelines needed to ease the glut have faced fierce environmental opposition and a grindingly slow approvals process.

So it came as sweet relief in February when, in a frenzy of action, the Federal Energy Regulatory Commission (Ferc) gave key approvals to three major northeast gas-pipeline projects that promise to help ease the glut over the next 18 months.

The approvals came just ahead of a major shakeup at Ferc. The sitting chairman, Norman Bay, was effectively pushed out by the new Trump administration, which has left the commission with just two of its five-member committee, not enough to make important decisions on major projects. It is likely to take months for the committee to get another member, so if the projects hadn't been approved they would have been left in the lurch until at least the autumn.

The most important of the approved projects is Energy Transfer's Rover Gas pipeline. The $4.2bn link will move 3.25bn cubic feet per day of natural gas 1,200km from the Utica and Marcellus shale fields through the Midwest to Michigan and into Canada. The project still has a few regulatory hurdles that could trip it up, but if all goes to plan it will start shipping gas in July, with full capacity reached in November.

Ferc also gave the green light to Williams's $1.9bn Atlantic Sunrise project. The pipeline will effectively expand and extend the existing Transco pipeline system, adding a total of 1.7bn cf/d in new capacity on a key line between the Marcellus in Pennsylvania and the northeast's energy hungry markets. Like the Rover project, it still faces hurdles, but Williams hopes to have the line up and running before the winter demand surge next year.

Finally, Ferc approved National Fuel Gas's $455m Northern Access pipeline. The line will ship 450m cf/d of gas about 160km from the Marcellus into New York and eventually to the Midwest and Canada by early next year.

In total, the approvals will provide 5.4bn cf/d of new takeaway capacity from the severely glutted Appalachian shale gasfields—a 25% boost to the region's output over the next year and a half.

For Marcellus and Utica producers that sell most of their gas into nearby markets—like Cabot Oil and Gas, Consol and Southwestern—it offers the promise of better prices in the region and improved returns. Prices at trading hubs around the Marcellus and Utica traded at between $1-2 per million British thermal units beneath Henry Hub for much of 2016 because of the regional supply glut. Some pricing hubs plunged below $1/m Btu during the relatively warm, and demand-light, autumn season in the northeast last year, even as the Henry Hub benchmark rallied to $3/m Btu.

Producers have found some workarounds to the capacity problems, sending more gas to the Midwest or south to the Gulf Coast where demand is booming for liquefied natural gas exports or piped shipments into Mexico. But the long transmission routes come at a price. It costs $0.50/m Btu or more to ship gas from the northeast to the Gulf Coast, making it difficult for Marcellus producers to compete with rising supplies from nearby fields in Texas, Oklahoma and Louisiana, though the northeast's lower production costs help offset some of the higher transport costs.

The new pipeline capacity should narrow the differentials and allow Marcellus and Utica producers to sell more gas closer to home. Analysts at Raymond James see the average differential closing to a roughly $0.60/m Btu discount for Northeast price points compared to Henry Hub. Bernstein Research sees an even narrower gap of $0.30.

Although the differentials should ease, the arrival of all the new pipelines poses a risk to overall gas prices. Depressed prices and limited takeaway options have stunted the explosive growth in the Marcellus and Utica plays seen over the past year, with output stuck around 22bn cf/d. This helped fuel natural gas's price rally in recent months.

Many northeast producers have supply commitments to fill the new pipelines. So output from the region should resume growing at a healthy clip, with an uptick in drilling activity and an acceleration in development of the region's drilled but uncompleted wells. This poses a bearish threat to US natural gas prices. The rally might be over.

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