Abundant production from gas shale plays last year and so far this year is starting to be felt in the natural gas pipeline and storage sector, according to analysts at Standard & Poor’s Ratings Services (S&P). During a briefing Tuesday they suggested that some pipes could face recontracting pressures and some premium storage services could lose a little pricing power.
“Recontracting risk in the natgas pipeline sector is really starting to become an emerging topic, and I think more so than it was six months ago or even two years ago,” William Ferara, an S&P director, said during the briefing. “We have heard very, very select cases of pipelines recontracting at lower rates. The average contract life is about five and a half years or so in the sector.”
Ferara noted growing production from shale plays and relatively recent projects such as Rockies Express Pipeline (REX), Midcontinent Express Pipeline and Fayetteville Express Pipeline, as well as Tiger Pipeline and projects by Boardwalk Pipeline Partners and projects bound for the Florida market.
“It is quite possible that we may see lower rates here in the near term and over the next handful of years,” Ferara said. “There’s such a change in the dynamic of the production given the shale plays that longer term we may see an impact on that.
“From the [pipeline project] sponsors’ perspective, they see that risk too, and that is why you do see long-term contracts. Typically at least a 10-year average life is common for some of the push pipes, and some of the pull pipes have 15- and 20-year contract lifes.”
Ferara noted how the development of REX crushed Rockies basis. “The offset is they have 10-year contracts running out to 2019. Basis spread, as we know, is very difficult to predict from one year to the next, and there will always be volatility in natgas prices and basis spreads.
“You certainly have to be concerned that if basis spreads remain tight for a very prolonged period of time that there could be significant recontracting risk for some certain assets out there, which may be negatively disadvantaged by how gas is produced and flows throughout the country.”
If robust gas storage development outpaces the need dictated by shale gas supply development, it could have a negative impact on the prices for storage services, said S&P’s Mark Habib, an associate director.
“Generally speaking, what we’ve seen over the last year is a slight moderation in prices for higher-turn storage assets,” he said. “By that I mean typically salt dome cavern storage that has high rates of cycling of gas within the asset, but still we’re seeing prices within the 15- to 20-cent range per month depending upon the amount of turn being provided.”
Robust shale gas production has helped put a floor under prices for storage service, he said. “And we expect that to remain the case as long as we’re seeing production levels out of the shale plays remain at current levels.
“That said, storage capacity is growing, so to the extent that it outpaces demand it could put some downward pressure on pricing.
“The second factor that I think is worth noting is that gas price volatility remains a big question mark,” Habib added. “There are a number of things that influence it but certainly to the extent that there is an increased reliance upon onshore production, it could leave gas prices a little bit less exposed to hurricane activity and potential disruptions from Gulf production.”
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