With the drilling slowdown in both oil and gas, gas production in North America has long been expected to fall, and indeed it has done so, but not by much. After reaching a peak of just under 74 Bcf/d, it has dropped off and US Lower-48 dry gas production is expected to remain stable at around 73.3 Bcf/d through October. While production has fallen in some areas in North America, most notably in western Canada, production in the Marcellus/Utica region continues on its strong upward course. It is currently estimated at 18.0 Bcf/d, up from 17.7 Bcf/d in July, and is expected to reach 18.5 Bcf/d by October's end. The main determinant of these results is pipeline capacity.

In the Marcellus/Utica region, the geological potential is well known - and well established through actual drilling and production. The recent estimate, in a study released by West Virginia University, that the Utica shale has a recoverable resource base of 782 Tcf, on top of any number of estimates indicating huge potential in the Marcellus, really means that the resource base in the region is so large as to be a secondary consideration. Yes, producers need to understand the geology and do their best to produce at the lowest possible unit cost. What limits production isn't a lack of geologic potential. It is the ability to export the gas out of the region. This is a function of pipeline capacity. As production continually sets new records, it also continually bumps up against pipeline export capacity constraints. This limits production and leads to severe basis discounts at traded points within the region.

Pipeline capacity is being added at a rapid pace. Texas Eastern Transmission Company's (TETCO) Uniontown to Gas City project entered full service on 1 September (two months ahead of schedule), increasing flows out of Appalachia to Indiana by 0.3 Bcf/d in the first half of September compared with August. TETCO's 550 MMcf/d Ohio Pipeline Energy Network project was initially scheduled to come online in November 2015, but the mainline portion of the project (reverse flow along part of the existing TETCO mainline) began service in mid-September. Westbound flows from the Marcellus/Utica on Rockies Express Pipeline LLC (REX) from Ohio towards Indiana increased to 1.4 Bcf/d in the first half of September. The REX expansion, which entered full service in August (flows had already begun ramping up in July), adds 1.2 Bcf/d of east-to-west capacity, bringing total westbound capacity on the pipeline to 1.8 Bcf/d. A further 2.3 Bcf/d of capacity expansions are expected to enter service in September-December. Producers in Appalachia are expected to reduce wellhead choking in the fourth quarter as heating load picks up and new firm pipeline capacity comes online.

In the years ahead, additional pipeline capacity out of the Marcellus/Utica region will be needed. Thankfully, producers have been signing up for capacity on the required pipelines, making it possible for growth in the Marcellus/Utica region to continue. Indeed, in the years ahead, IHS Energy expects that the Marcellus/Utica region will produce essentially all of the expected production growth. (See Figure below.) But because of the infrastructure requirements, this growth will come in surges. Each fall, as new export capacity comes on line, production in the Marcellus/Utica region will jump to fill it - a dynamic observed repeatedly in recent years. It will be pipeline capacity that sets the pace of supply growth.

Learn more about IHS North America Natural Gas Service.

22 September 2015 Bob Ineson, Managing Director.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.