The elephant named Marcellus that has been sitting on Northeast-Henry Hub basis isn't about to move along, and what used to be a premium market will see trades discounted to the U.S. gas benchmark for a while, analysts at Credit Suisse said in a note Tuesday.
"...[T]he once Northeast premium market has all but dissipated today," thanks to abundant supplies of gas from the Marcellus Shale, not to mention the Utica Shale, which has yet to come into its own. The analysts said average basis from the major Northeast trading hubs has fallen 35 cents year over year from an 11-cent premium to Henry Hub last August to a 24-cent discount currently.
Ample supplies of natural gas from the Marcellus and Utica shale plays has flattened basis, forcing companies out of the gas marketing business due to the lack of spreads. At least one gas trader wondered aloud to NGI what his next line of work might be (see Daily GPI, Aug. 1; July 22).
In June Oneok shut down its natural gas marketing business in a nod to the reality of flattened basis spreads and the more challenging gas trading environment (see Daily GPI, June 13). JPMorgan Chase & Co. and Hess Corp. have also recently announced their exits from gas marketing for varying reasons (see Daily GPI, July 31; July 29).
"Following the completion of the first of many processing plants in June, daily basis differentials at the Dominion South hub fell negative to lows of 60 cents/Mcf," Credit Suisse said. "Based on our regional supply and demand work, we expect wider Northeast disparities may continue indefinitely in Appalachian gas markets, with longer-term differentials poised to be 25 cents/Mcf to 50 cents/Mcf below Nymex (versus the long-term premium of 20 cents/Mcf)."
Thanks to the Northeast shale plays, the region is nearly 100% self-sufficient during the summer and requires "significantly less" gas from the South, Midcontinent and Canada to meet heating demand during peak winter months. As New England markets become increasingly connected to Marcellus and Utica supply, they could be the next to see a basis collapse.
Oversupply in the Northeast and wet gas production from northwestern Pennsylvania that doesn't conform to pipeline specifications have made for "heavy discounts" at pricing points Dominion South as well as on nearby Columbia Gas Transmission, the analysts said. "Given the number of pipeline projects adding import capacity to the New Jersey-New York markets over the next six to 12 months, TETCO M3, Transco Z6 (non-NY) and Transco Z6 NY may be next to see sustained pricing discounts to Henry Hub," Credit Suisse said.
According to NGI's Bidweek Survey, while the Aug. 2013 bidweek average spot price at Henry Hub was $3.45, Dominion, which represents southwestern Pennsylvania and West Virginia, was trading at $2.94. Representing northeastern Pennsylvania, Tennessee Zone 4 (Marcellus) was trading at $1.97, while Transco Leidy Line was at $2.03.
More than half of the natural gas pipeline projects that entered service last year were in the Northeast, according to the Energy Information Administration (see Shale Daily, March 26). The two largest projects added to the Northeast in 2012 -- Dominion Transmission Inc.'s Appalachian Gateway Project (see Shale Daily,Sept. 4, 2012) and Equitrans LP's Sunrise Project (see Shale Daily, July 23, 2012) -- both move natural gas from Marcellus production fields to northeastern markets.
Genscape Inc. senior natural gas analyst Andy Krebs recently told NGI's Shale Daily that pipeline capacity out of the Appalachian region is desperately needed as simply dialing back production from other regions is no longer sufficient (seeDaily GPI, July 10).
To redirect gas bound for the bargain Northeast along traditional routes from the Gulf Coast, Midcontinent and Rocky Mountains, pipelines have announced a number of physical backhaul projects. "We think this indicates a desire by producers to find a permanent solution to what is likely to be acute oversupply in the Northeast gas market," Credit Suisse said.
Among the projects are Texas Eastern Transmission's Gulf Markets Expansion, Tennessee Gas Pipeline's Southwest Louisiana Supply project, and Kinder Morgan's Elba Express Pipeline. The analysts said Columbia Gas Transmission has been backhauling gas from Kentucky to Louisiana to serve the Gulf Coast region, and Rockies Express Pipeline (REX) recently announced a backhaul agreement with an unnamed Utica producer. Longer term, REX has said it plans to become a bidirectional pipeline (see Shale Daily, May 16).