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Basis Blowouts May Return, Analyst Warns

The recent construction wave of natural gas pipeline infrastructure might have flattened basis differentials, but not forever, according to BNP Paribas analyst Teri Viswanath. More infrastructure will be needed to avoid market constraints and basis spikes down the road, she wrote in a market note last week.

"[W]hile there are a few projects on the horizon that will expand market-area capacity, insufficient follow-on investment could re-introduce regional price volatility and even hamper the structural demand growth we envision," Viswanath said.

Those looking for the next basis "blowout" should keep their eyes on the Northeast, where congestion on gas pipelines might worsen; and the Southeast, due to the rapid growth of gas-fired power generation demand there, Viswanath said. "From our vantage point, infrastructure investment (or the lack thereof) is an emerging factor that might ration the amount of utility-led structural demand growth we see ahead."

The boom in shale gas production is what drove the most recent pipeline infrastructure buildout. Viswanath cited a report by the Federal Energy Regulatory Commission in which the agency said in 2009 that the gas market was closer than ever to being a single market with limited congestion. "However, it is unclear whether this low volatility will necessarily persist," Viswanath said.

Over the last half-decade, about 115 Bcf/d of new transportation capacity was added, she said. The latest burst of this buildout is in the Northeast, where 3.5 Bcf/d of incremental capacity is slated to enter service by year-end. Viswanath noted that producers picked up the tab for the majority of this construction as they needed to get their production to market. "In fact, only two of the 25 costliest pipeline projects commissioned during this period could be categorized as consumer-led," she said.

Deliverability of gas to consumers has shown "only marginal improvement" by most measures, and Viswanath said this could be due to the fact that producers financed the majority of the latest pipeline buildout, making the result asymmetrical. "During the past five years, interstate pipeline peak-day deliverability increased less than 20 Bcf/d while regional inflow capacity expanded by slightly less than 13 Bcf/d...[M]ost of the supply-led pipelines were tied into the existing grid, thereby leaving downstream access mostly unchanged."

Consumers haven't been harmed by this due to low gas prices and the competition created among supply basins by the latest buildout boom, which has squashed basis differentials. "However, over a longer horizon, insufficient pipeline investment could re-introduce regional price volatility and limit structural demand growth," Viswanath said.

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