Supply dynamics in the U.S. natural gas industry are rapidly evolving, and the Appalachian region in the Northeast U.S. is a significant proponent of change, according to a new report published by Standard & Poor's ratings services.
Specifically, the region is home to the sprawling Marcellus shale, which could contain recoverable resources equal to almost half of the current proven natural gas reserves in the U.S. Since production in the region is largely undeveloped, increasingly rapid development is attracting new exploration and production activity—a trend that is already affecting long-standing national and regional gas flows, as well as regional pricing.
"The increased use of specialized technological capabilities such as horizontal drilling and hydraulic fracturing has really sparked the development of this resource," said credit analyst Carin Dehne-Kiley, a director in Standard & Poor's oil and gas group. "The rapid increase in production is clearly reducing the area's dependence on gas imports from other areas, and this growing independence is affecting national supply dynamics and the premiums that local producers could previously charge."
Since an array of major metropolitan areas are in the Northeast, it's little surprise that the region has historically relied on gas from elsewhere to meet its significant natural gas demand. As such, the location of the Marcellus shale holds an important advantage for producers and consumers of natural gas—even though natural gas prices have been notably weak in recent months.
Dehne-Kiley notes that the lower all-in costs and a higher natural gas liquids component relative to other producing areas of the U.S., as well as its prime location near major consuming centers, will ensure the Marcellus remains a key contributor to U.S. natural gas supply.
"We believe the development of the Marcellus will particularly benefit two groups of issuers that we rate: midstream and pipeline companies that are building or expanding infrastructure in the northeast; and E&P companies that produce natural gas and natural gas liquids in the region," said credit analyst Bill Ferara, a director in Standard & Poor's midstream energy and merchant power group.
Conversely, Ferara notes that two other groups may not fare as well if they don't modify their current strategies to offset potential business risk or reduce debt to limit the possible dips in cash flow: long-haul pipeline operators that are unlikely or unable to reverse their pipeline flows, face recontracting risk, or have high asset concentration; and E&P companies producing natural gas in the U.S. Rockies or Canada that are currently sending gas to the northeast.
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