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Northeast infrastructure delays could increase natural gas prices

A delay in Northeast infrastructure expansions will trap gasin the Marcellus and Utica and depress realized prices for regional producers,while at the same time potentially increasing gas prices outside of Appalachia,according to one energy analyst.

Between 2016 and 2021, Platts Bentek forecasts about 30Bcf/d of demand in the Northeast, senior energy analyst Luke Jackson said onApril 12 at the LDC Gas Forums Southeast conference in Atlanta. "But thatgrowth is very much dependent on pipeline infrastructure," he said.

Right now gas supply has bumped up against the ceiling oflimited pipeline capacity, Jackson said. But there is just under 15 Bcf/d ofnew pipeline capacity coming online between 2016 and 2017, and that could helpdrive a price recovery in the Northeast gas supply areas.

"The market has the expectation that once the pipelinecapacity catches up with production in 2017 … that will be the basis for arecovery," Jackson said. Gas prices could jump 20-30 cents/MMBtu inNortheast production zones if those pipeline projects fall into place between2016 and 2017.

"But that's a big 'if,'" Jackson said. He pointedto delays in Northeast pipeline projects such as PennEast, Atlantic Sunrise andConstitution because of slowdowns in the FERC approval process and pushbackfrom environmental opposition. "So that's really the big risk to thetiming of this forecast," Jackson said.

When these greenfield projects take another year, the relieffor producers and consumers also takes another year. "Rather than 2017, itgets bumped to 2018 [or] even in the middle of 2019," he said.

There are also challenges to LNG exports, which is anothermajor outlet for production in the near term, Jackson said. U.S. exportterminals are being built, but global LNG demand has been "underwhelming,"especially in Asia and the Middle East, he said.

Jackson and Bentek are bullish on gas prices, based on histeam's projections that U.S. production will only grow by about 4 Bcf/d by2021, while demand grows by about 12 Bcf/d.

"So there's a clear gap," he said. "Somethinghas to give. You are going to need 8 Bcf/d of supply from new drilling in orderto help balance the market, a pretty substantial amount of new production."

"Again, in order to get that increased drilling, you doneed a pipe response," he said, "and as I talked about earlier … ifthe Northeast can't be that supplier because of infrastructure constraints,that drilling and gas production has to come from an area outside the Marcellusand Utica, such as the Haynesville, the Fayetteville, the Eagle Ford … and youwill need to pay a higher price to incentivize such a response.

"That is why we are currently above the NYMEX forwardcurve, especially in the outer years in 2020 and 2021," Jackson said. "Weare hovering around $4-$4.50."

Platts Bentek andS&P Global Market Intelligence are offerings of McGraw Hill Financial Inc.