In January, when constraints sent natural gas prices skyrocketing during the “bomb cyclone” in the Northeast, the lack of pipeline capacity destroyed as much as 4 Bcf/d of demand as more coal and fuel oil entered the market, according to RBN Energy’s David Braziel, who directs finance and fundamental analysis.
Braziel, during a presentation in Boston at this week’s LDC Gas Forum, focused on Transcontinental Gas Pipe Line (Transco), where spot prices along its Zone 5 and Zone 6 peaked above $100/MMBtu this past winter. He said it was the “poster child” of the shifting supply/demand dynamics in the Northeast.
This shift has seen production out of the Marcellus and Utica shales reverse flows on Transco, driving lower prices for most of the year and leading to more gas-fired power generation. “The tremendous growth in Marcellus production has flipped Transco on its head,” Braziel said.
Prices at Transco Zone 6 had consistently traded at a premium to Zone 5, which in turn traded at a premium to Zone 4, reflecting the cost of transportation as gas moved south to north on the pipeline, he said.
“Now on almost all summer days aggregate Northeast supply exceeds demand and gas is looking for routes out, so Transco Zone 6 prices trade at a discount to Zone 5,” Braziel said. “With abundant cheap natural gas available for most of the year, a lot more gas is being used for baseload power generation” in place of coal.
In fact, “the switch from coal to gas is happening at a faster pace along the East Coast” compared to the nation overall. Demand along the “eastern Transco corridor” has grown by more than 3 Bcf/d over the past decade, with 95% of the growth occurring in the power sector, according to Braziel.
However, the dynamic is more complicated in the winter, specifically during periods of sustained cold as more customers are relying on electricity for heat.
Pipeline constraints “in the East on cold days” are “inhibiting the fundamental change that we’re seeing the rest of the year,” Braziel said. RBN estimates that along the eastern Transco corridor, “if sufficient pipeline capacity had been available, nearly 4 Bcf/d of additional gas would have been consumed in power generation on certain days” in January, more than the capacity that would be added once the Atlantic Sunrise expansion is fully in service.
During previous winters, colder temperatures corresponded with rising volumes of gas used for power generation, he noted.
“Or, in the case of winter 2015/16, when gas prices were very low, the volume stayed high,” Braziel said. “However, in winter 2017/18, the volume of gas used to generate power declined when average temperatures plummeted well below freezing.”
With limited pipeline capacity keeping more gas from reaching Transco Zone 5 and 6 no matter the price, spot prices continued to climb during the January bomb cyclone, allowing alternatives to enter the market, Braziel said. First came coal at around $3-6/MMBtu, then $7-10 brought “some of the highest cost gas supplies” into the market. When still more gas was demanded, prices rose to $20, making oil-fired generation economic.
“On a few days this winter, even that wasn’t enough,” Braziel said. “Gas prices continued to rise,” likely to levels where some industrial customers were priced out of the market.