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EEA Consultants Expect Basis Blowout to Return to Northeast Next Winter

EEA Consultants Expect Basis Blowout to Return to Northeast Next Winter

The cold north wind certainly helped blow out the price difference, or basis, this winter between the Gulf Coast producing region spot price points and the northeastern gas market, but pipeline capacity constraints to the market region have been known for several years. Unfortunately, there are few projects available that can provide any relief in the near term, according to consultants at Arlington, VA-based Energy and Environmental Analysis Inc. (EEA).

Average daily gas prices in New England and New York City exceeded $40/MMBtu on Jan. 14 for Jan. 15 gas flows. Prices at the Algonquin citygate soared to an average of $64.22 on Jan. 14 and prices at Iroquois Zone 2 averaged $55.38 and hit a new spot market record high of $76/MMBtu. Transco Zone 6 New York averaged $44.81 and reached a high of $72 that day. New York-Henry Hub basis averaged $39.07 compared to normal basis during most months of about 50 cents.

New York and Connecticut consumers can give at least partial credit to their state officials for the record high gas prices and basis this winter. Despite holding federal approvals, the Millennium and Islander East pipeline projects, which initially would have added about 1 Bcf/d of new pipeline capacity to the New York market, remain blocked by the states.

Iroquois' Eastchester project, meanwhile, went into service Thursday but will do very little to relieve pressure on prices, EEA said in its Monthly Gas Update. Eastchester should improve the movement of gas to New York City from New England, but New England is suffering under the same market conditions and similar pipeline access constraints.

As a result, EEA projects that there will be another basis blowout next winter in the Northeast. New England consumers may look to Maritimes & Northeast Pipeline for help through its Phase IV expansion, but gas production from the Sable Island project offshore Nova Scotia has been suffering, reserves are smaller than previously thought and there are new doubts about the long-term health of the Atlantic Canadian gas industry.

"Could LNG fill the gap and provide added supply to the region? In the short run, it seems unlikely that LNG terminals would have any more success than the pipelines in getting their facilities built, but time will tell," EEA said.

While basis in the Northeast most likely will hold the spotlight over the next couple of years, EEA also believes there's a potential for higher basis numbers between supply points and Chicago and California.

Kern River's 900 MMcf/d 2003 pipeline expansion dropped basis between Opal, WY, and the Southern California border at Topock, AZ, to pre-California 2001 crisis levels of about 35 cents/MMBtu from the $2 basis levels seen in 2002. However, EEA's forecast shows that California-Rockies basis may soon begin rising again.

"There is a strong indication that basis out of the Rocky Mountains could again climb in non-winter months over the next two years," EEA said. "More production continues to come online in the Powder River and other frontier areas, which will again fill the pipes. The next round of expansion will almost certainly take Rockies gas eastward with projects like Colorado Interstate's Cheyenne Plains or Kinder Morgan's Advantage likely to be built in 2005 or 2006."

Regarding Chicago basis, EEA said TransCanada's 2002 maintenance effort, which removed some mainline capacity, and its recent decision to boost the price floor for rates on interruptible transportation to 110% of firm transportation costs has set the stage for higher basis levels between Chicago and Alberta. EEA predicts that Chicago basis to Alberta will remain firm, averaging around 90 cents/MMBtu. "Some of the higher basis may be the result of the current gas price environment...but the majority of the higher basis appears to be the result of the 110% IT floor raising the price of capacity at the margin."

Despite these basis concerns, EEA said the situation is "entirely consistent with a healthy integrated gas market, and reflects rational market responses to the situations currently present.

"As always weather is a major driver of uncertainty in the market and is having a major impact on the Northeast markets this winter. However repeated high basis in New York City over the past several years is a strong signal for the market that additional capacity is warranted."

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