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Barclays Sees 'Anemic' Northeast Demand Growth

As production from the Marcellus Shale grows and gas continues to trudge eastward on the Rockies Express Pipeline (REX), gas-fired power generation and exports to Canada are about the only opportunities to relieve Northeast oversupply, Barclays Capital analysts said in a note Tuesday.

Gas gained market share from coal in the region during 2009 and 2010, the analysts said. In the latter year it is thought to be mainly due to hot temperatures, which increased the pull on gas-fired peaking plants.

"While coal could regain share if temperatures return to normal, we expect that most of the price-sensitive demand should continue to be served by natural gas as long as relative prices remain steady," the analysts said.

However, gas demand among power generators still is below 2007 levels. And economic growth and temperatures are unlikely to surpass those of 2010. "This suggests that further meaningful demand growth from current levels can be achieved only through cheaper [natural gas] prices relative to coal," they said.

While efficiency gains are driving reduced consumption among residential consumers, this is having the smallest effect in the Northeast, the analysts noted, due to the fact that homes in the region tend to be older and less energy efficient. If more of the region's consumers switched from oil to natural gas for heating, it could result in demand growth of up to 1 Bcf/d, they said. However, limited pipeline infrastructure and the cost of conversions suggest that fuel switching will be modest.

The Barclays analysts said regional demand growth "should be anemic" going forward.

Although prospects for growth in the Northeast on the demand side are meager, Marcellus producers are expected to continue producing more gas. "Over the next several years Marcellus production could grow to a multiple of today's level, paced only by infrastructure buildout," the analysts said.

Add to Marcellus production more gas available from liquefied natural gas (LNG) terminals/ports on the East Coast such as the one at Everett, MA, Canaport LNG, Northwest Gateway and Neptune LNG. Everett has been providing a steady supply to the Boston area of about 0.2-0.7 Bcf/d and is expected to continue to do so. Other terminals are running below capacity with higher usage in the winter, the analysts noted.

And then there's REX, which can carry up to 1.8 Bcf/d from the Rockies to eastern markets.

All of this domestic supply available to the Northeast has squeezed out some Canadian imports, the analysts said. "Net imports [from Canada] through the Northeast declined 0.6 Bcf/d y/y in 2009 and a further 0.5 Bcf/d in 2010...We continue to expect Canadian supply to decrease, resulting directly in less gas imported to the Northeast."

Speaking of Canada, exports to the country could be the answer for some of the oversupply in the Northeast. "TransCanada toll rates have helped to decrease long-haul gas supply from west to east and leave a gap for U.S. supply to fill," the Barclays team said. "In addition, there are plans to increase gas-fired capacity through the 400 MW New York Energy Center Plant (2012) and the 400 MW Cambridge peaker (timing unknown). As well as existing capacity, the 300 MW Thunder Bay [power] plant and others are planned for conversion to natural gas."

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