A fierce interregional battle is set to rage in June, when the Rockies Express Pipeline (REX) East, carrying up to 1.6 Bcf/d, completes its march into Lebanon, OH. REX East will face an onslaught of gas pouring in from Midcontinent shale and tight gas production, as well as Appalachia's Marcellus Shale, Evergreen, CO-based Bentek Energy LLC said last week.
"These supplies will move into the Northeast market regardless of producer budget cuts due to the recent financial crisis," said Bentek Managing Director Rusty Braziel. "Rockies producers are the largest holders of firm capacity on REX, and these companies can be expected to utilize 100% of the pipeline capacity to move their gas toward more lucrative markets in the Northeast. Unfortunately, neither the pipeline delivery capacity into the region nor the demand growth in the Northeast is adequate enough to absorb all of these new supplies."
Bentek examined the impact of the anticipated market imbalances, gas flows and price implications from the date the REX East pipeline goes into service and beyond in a three-part series, the first of which was issued last week. Bentek also launched the "Northeast Observer," which provides updates on market developments.
The Northeast market is by far the largest and most dynamic regional natural gas market in North America, served by a network of interstate pipelines, local distribution companies and one of the highest concentrations of gas storage in the world, Bentek noted. Its attractive market encouraged the development of REX and other pipeline expansions that want to target the historically high prices in the region.
However, the ability of these supplies to flow west to east is constrained by pipeline capacity, particularly during the winter peak demand season, said the consultant. Even if sufficient additional pipeline capacity is built, the rate of demand growth in the Northeast is limited, not nearly enough to absorb the incremental more than 5.0 Bcf/d that could be available to flow eastward by 2011.
"We expect to see a traffic jam of huge proportions, with no immediate solution on the horizon to alleviate the gridlock," Braziel noted. "To some extent, the pricing pressures experienced by Rockies and Texas producers will move eastward into Northeast pricing hubs that have traditionally enjoyed premium pricing. With additional infrastructure construction being completed and new projects coming on-line over the next few years, we expect to see significant volatility in regional price differentials for a while to come."
The start-up of the Millennium Pipeline by the end of this year should provide a preview of upcoming market shifts, said Braziel.
Millennium is the first major interstate pipeline project to be brought on-line in the Northeast in nearly 10 years, and it would add significant delivery capacity into a region that is pipeline-constrained to flow volumes further east of Leidy, PA (see NGI, Nov. 3). Millennium supplies would put downward pressure on several premium Northeast markets, tightening spreads between upstream markets and key pricing hubs at Texas Eastern (TETCO) M-3, Algonquin citygate, Iroquois Zone 2, Transco Zone 6-New York City (NYC) and Transco Zone 6 non-NYC, according to Bentek.
"Perhaps the biggest winners in this coming supply-demand market imbalance will be the holders of firm pipeline transportation capacity eastward from the constrained areas around Lebanon on TETCO, Dominion and TCO (Columbia Gas)," Braziel said. "Appalachian producers, accustomed to moving supplies eastward on an interruptible transportation basis, will be required to sell increasingly to holders of firm transportation or to acquire firm transportation to ensure their volumes won't be curtailed."
The competition will put pressure on prices, which eventually should lead to some relief for utility consumers. But it may not happen for a while, Braziel said.
"You are absolutely right about the other winners in the Northeast market -- consumers," he told NGI. "The lower prices that have been enjoyed by Rockies and other western region consumers are moving to the East.
"The catch is that REX East only gets that gas to the western edge of Ohio in June 2009, and then to the eastern edge of Ohio in November 2009. Great for Ohio, but it is a long way in pipeline miles from Ohio to New York, New Jersey, Massachusetts and other major eastern seaboard population centers."
As Braziel explained, "There is only about 325 MMcf/d [of] available capacity outbound at Lebanon on the average day. That means that of the 1.6 Bcf/d that could come to Lebanon on REX, only 325 MMcf/d can make it out of Lebanon and into major market areas to the east. Thus, while it is good for Ohio, it is not such a big deal for many consumers in the East -- yet."
Neither the demand infrastructure nor the pipeline capacity in the Northeast are enough to absorb the new supplies, he said.
Targeting the Northeast is a natural because the "market is huge, soaring above 30 Bcf/d on peak winter days," Bentek reported. A network of interstate pipes and local distribution companies serves the region, and the Northeast enjoys what may be the highest concentration of gas storage capacity in the world, with more than 1 Tcf of working capacity, or about 28% of the U.S. total.
Gas demand also is growing, fed by a combination of increased gas-fired power generation and new home fuel oil-to-gas conversions. However, all of those positives are tempered by what's available now.
"Unfortunately for gas suppliers, there are some serious limitations to the incremental volume of gas that can be absorbed in the region," Bentek noted. West-to-east pipeline capacity across the region is constrained, particularly during the winter peak demand season. And even if pipe capacity were adequate, demand growth is a problem, Bentek found.
Based on estimates of incremental supply potential, "more than 5 Bcf/d could be targeting the Northeast by 2011," Bentek estimated. Those volumes don't include any growth in liquefied natural gas imports, nor do they include increased Appalachian gas supplies. And even under "optimistic" scenarios, "demand growth during the period is unlikely to exceed 0.2 Bcf/d..."
Bentek is tracking nearly 50 gas pipeline expansions and greenfield projects that would move gas across the four capacity constraint "waves." As these projects are completed, "the surplus that lands in Ohio in 2009 will move eastward, presumably making it all the way to the major eastern seaboard population centers over the 2010-14 period. That is when the benefits of the REX expansion will really hit home for large numbers of consumers," said Braziel.
U.S. residential gas prices are projected to average $13.02/Mcf between now and March, which is 2% higher than last winter, according to the Energy Information Administration's (EIA) Short-Term Energy Outlook, which was issued Wednesday (see related story). Meanwhile, residential heating oil prices are projected to drop about 17%, and residential propane prices are projected to be down 10% from last winter.
"The recent drop in power generation fuel costs has caused some utilities to reconsider the steep price increases announced this past summer," EIA noted. "However, fuel costs still remain high, and it is unlikely that electricity rates for most customers will fall significantly in the near term. U.S. residential electricity prices are expected to increase by about 6.5% in both 2008 and 2009..."
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