Increases in domestic production, new pipeline infrastructure and the shifting sources of imports will create a “bonanza” for natural gas buyers in the Northeast, according to Evergreen, CO-based Bentek Energy, which just released the third part of its three-part “Catch the Wave” report (see Daily GPI, Jan. 14; Nov. 14, 2008) documenting changes to the region that has traditionally been the highest-priced North American market.

Noting that the Northeast natural gas market is entering a period of “unparalleled risk and opportunity,” the research and analysis firm said producers in both domestic and global gas markets are spending billions to bring new supplies to the region, creating an “unprecedented level of gas-on-gas competition” in the Northeast. Bentek Managing Director Rusty Braziel noted that Northeast gas buyers have not been faced with such a combination of attractive supply alternatives combined with highly complex market dynamics in quite a long time.

“In just a few short weeks, the Rockies Express Pipeline [REX] will thrust Rockies producers into direct competition with suppliers from the Gulf and Midcontinent regions for Northeast market share,” he said. “Production from those same regions continues to increase, even in the face of lower prices and falling rig counts. In the Gulf, production is growing so fast that it is threatening to exceed maximum outbound throughput capacity on all of the region’s major pipeline systems. Demand destruction and LNG [liquefied natural gas] imports remain wild cards. It is a lot of things to be hitting the market at the same time, but mostly good for natural gas buyers.”

More pipe capacity to the Northeast is coming via REX-East, but the exact timing is still uncertain. REX said wet weather was delaying interim service on the 683-mile REX-East from April 1 to the first half of April (see Daily GPI, March 13). Initial REX-East service (or interim service) is projected to commence sometime within the first half of April, with a capacity of 1,600 MDth/d into Zone 3. Additionally, service to Lebanon, OH, is projected to commence June 15 with a capacity of 1,600 MDth/d. In-service of the fully powered REX-East pipeline to Clarington, OH, is projected to commence Nov. 1 with a capacity of 1,800 MDth/d.

Even as producers continue to lay down rigs and scale back capital expenditure budgets in the face of the current economic recession, Bentek said U.S. gas production is still expected to grow in 2009 as producers move drilling rigs to areas with much higher per-well initial production rates, such as the Haynesville play located in northwest Louisiana and East Texas. The firm believes that the shift in capital deployment, combined with the aggressive application of new drilling and completion technologies, is offsetting the impact of a free-fall in the rig count, with the net result an expected 4% increase in production for 2009, according to the report.

While natural gas buyers in the Northeast can look forward to a period of attractive prices and greater supply reliability this year, the following years could be marked by greater market uncertainty, Bentek said. Over the longer term, the firm said there will be a growing threat that a weakened exploration and production (E&P) industry and continuing drilling cutbacks could reduce the amount of supply available to the Northeast. Due to capital market constraints, low prices and falling demand, such deteriorating conditions for U.S. producers could result in another cycle of supply shortfalls in the traditionally cyclical natural gas market.

Bentek’s report said technology has reached the point where the exploration part of the E&P equation is no longer a concern, which is turning production into more of a manufacturing business.

“The application of new drilling technologies to unconventional resource plays in areas where the geology is well understood has resulted in extremely high well success rates and much larger reserves inventories,” said Braziel. “As a consequence, many of the traditional finding and development uncertainties in the E&P business are being replaced by risks generally associated with classical manufacturing economics, such as overcapacity, high inventories and marginalized prices. This has important implications for the supply-demand balance over the long term.”

Taking a look at the demand side, Bentek said rumors of the “death of demand” due to the recession are greatly exaggerated. The report discovered an apparent discrepancy between demand and pricing in the Northeast this winter. Even with the recession killing off some demand, Bentek’s analysis found that strong heating load pushed the average Northeast demand up about 4% this winter with peak demand soaring to more than 35 Bcf/d on Jan. 16, 2009, compared to peaks of 28-32 Bcf/d during the previous four winters. Despite the uptick in demand, Bentek found that peak and average daily gas price premiums in the Northeast this winter were significantly lower compared to last winter, likely due to access to cheaper supplies due to pipeline expansions such as Millennium-NE07, which went into service in December, tying the U.S. Northeast to increased Canadian gas supplies (see Daily GPI, Dec. 23, 2008).

The report showed that weaker prices at the Henry Hub will support a positive Northeast basis differential. Bentek said that with Gulf production continuing to grow and expansion projects such as Gulf Crossing and Midcontinent Express relieving interregional pipeline capacity constraints, Gulf prices are projected to weaken relative to other U.S. supply basins and Northeast markets. “This is expected to keep Northeast basis spreads at or above variable transportation costs from the Gulf even after REX-East brings 1.8 Bcf/d of new capacity into the Ohio Valley,” Bentek said in the report. “Only if significant volumes of LNG are delivered into Cove Point, Northeast Gateway and Canaport is Northeast basis likely to trade flat to Henry.”

Braziel noted that imports, especially from the United States’ northern neighbor, are a big factor in the Northeast natural gas equation. “Imports from Canada are expected to continue decreasing as conventional production in the Western Canadian Sedimentary Basin declines,” he said. “However, most of the decrease will take place at border crossing points in the Midwest and West, which will have a minimal effect on Northeast supply levels. Canadian imports averaged 10.7 Bcf/d in 2008, but are projected to decline slightly to average about 10.4 Bcf/d in 2009.”

Addressing the LNG wildcard, the Bentek report said depressed U.S. natural gas prices will likely keep the country from becoming “a major dumping ground” for global LNG surpluses, at least in the short term. If LNG does show up, the report said the shipments would likely head to terminals on the Atlantic Seaboard and Atlantic Canada, not those on the Gulf Coast.

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.