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Shale Gas and Pipeline Risk

Earnings erosion in a more competitive world.
April 2012

Recent years have seen fundamental changes in the supply and competitive landscape of the North American natural gas market. In response to high natural gas prices that prevailed during most of the last decade, gas producers in the lower 48 now have developed new sources of supply and technology, particularly to access new shale gas formations. These new supplies have encouraged a substantial expansion of the natural gas pipeline network in North America to allow the producers to reach end-use markets.

These events also have helped gas customers through greater supply diversity, lower commodity costs and expanded service options. However, if customers want to continue to enjoy the relatively low costs of capital that the regulatory compact provides in the long run, affected pipelines will need help from regulators.

That’s because these new gas supplies also have changed flow patterns in the North American pipeline grid. The result has been a considerable increase in competition and risk, which can have serious consequences for pipelines and their required rates of return. This new landscape poses challenges for regulators and management alike.

Several regions in North America have been experiencing growth in gas production. The Rocky Mountain supply area grew rapidly last decade, and a substantial amount of gas pipeline capacity has been added to transport these supplies to both eastern and western U.S. gas markets. New supplies have also been flowing into the eastern U.S. pipeline grid, from shale supply areas in the U.S. Gulf Coast region, and more recently from the rapidly developing Marcellus shale in the Appalachian region of the U.S. New shale supplies are also being developed in western Canada—especially in Northeast British Columbia. These supplies have the potential to offset declines in western Canadian conventional gas production and serve markets in North America or overseas in the form of LNG.

Over the past few years, the new supplies, particularly those developed in the lower 48, have altered the dynamics of pipeline competition in North America. The growth of Marcellus shale supplies has been particularly noteworthy as a growing indigenous source of supply in the Northeast U.S. that competes in Northeast markets with more distant supply sources.

The extent of the shale expansion is revealed in a recent EIA presentation, which shows that U.S. shale supplies have grown from roughly 0.5 Tcf (1.4 Bcf/d) in 2004 to nearly 5.0 Tcf in 2010 (13.7 Bcf/d), an increase of roughly 900 percent. EIA is currently projecting that shale production will grow from 14 percent of total U.S. consumption in 2009 to over 50 percent in 2035, while net imports—including both LNG and pipeline imports from Canada—are projected to decline from 11 percent in 2009 to 1 percent in 2035 (see Figure 1) . Thus, shale gas is now predicted to effectively