Long-standing trading patterns at major natural gas hubs in Southeast Texas could be reshaped over the next decade as limitations in pipeline capacity closest to the Houston market arise because of increasing Permian Basin volumes.

Without new pipeline capacity built from the Katy and Agua Dulce hubs to Houston, Houston Ship Channel (HSC) gas prices are set to climb to a significant premium as so-called “last mile” connectivity issues constrain the market, according to Wood Mackenzie.

The last mile refers to the portion of the natural gas pipeline grid from the Katy hub near Houston to HSC and from Agua Dulce in South Texas to HSC. How it takes shape is ultimately predicated on Permian gas supply growth, which could increase to nearly 20 Bcf/d by 2025 and will play a crucial role in determining the direction of gas basis, according to the firm.

“A key component is where the demand is and where the pipes are going,” Wood Mackenzie senior research analyst Matt McLean said during a presentation at Gastech 2019 in Houston last week.

Kinder Morgan Inc.’s Gulf Coast Express (GCX) and Permian Highway Pipeline, as well as MPLX LP-backed Whistler Pipeline, are set to release about 6 Bcf/d of bottlenecked Permian associated gas into the market between now and late 2021.

GCX, already flowing initial volumes with full in-service expected by the end of September, will deliver Permian gas to Agua Dulce. Permian Highway, due online in the fall 2020, would move West Texas gas to the Katy hub. Whistler would transport gas from West Texas to Agua Dulce, where a 30-inch diameter pipeline would then run 170 miles south and terminate in Wharton County, southwest of Houston.

Given the expected surge in Permian gas growth, as well as a projected resumption of Eagle Ford Shale production growth, those pipelines are expected to fill quickly. However, once those pipelines fill, “the problem is getting gas over to HSC,” McLean said.

The Katy hub serves as a “gateway” of sorts to the HSC, which is rather insulated from gas supply, McLean said. Meanwhile, demand is surging in South Texas, not only in the power and industrial sectors, but also from liquefied natural gas (LNG) exports from the Freeport and Corpus Christi terminals and exports to Mexico. Altogether, Wood Mackenzie sees the region adding 8 Bcf/d of domestic demand growth between 2019 and 2040.

As the first wave of Permian pipelines enter service, gas would fill the cheapest pipelines first, “further constraining the last mile and making it more expensive to get gas to the HSC,” McLean said.

Wood Mackenzie expects the price spread between Katy and HSC to widen over time, with HSC climbing to a 20-cent premium by 2024. For comparison, Katy has averaged a modest half-cent higher than HSC since the start of the year, according to NGI’s Daily GPI.

Flow rates are also expected to shift. Legacy transportation systems like Atmos Pipeline, Houston Pipeline (HPL) and Transcontinental Gas Pipe Line (Transco) could see full utilization downstream of the Katy hub by 2030, according to Wood Mackenzie. So far this year, Transco has seen no utilization of its system downstream of Katy, while HPL has seen 40% utilization. Atmos has seen the highest utilization rate of about 60%.

A similar development is seen occurring in the routes from Agua Dulce to HSC, especially as Cheniere Energy Inc.’s Corpus Christi Stage 3 expansion ramps up. That project, not yet sanctioned, would include up to seven midscale liquefaction trains with a total expected capacity of 9.5 million metric tons/year.

The firm forecasts that HSC’s premium over Agua Dulce would blow out to more than 40 cents in the next decade. Agua Dulce, for now, remains illiquid, but NGI price data shows it holding a roughly 11-cent premium over HSC so far in 2019.

Meanwhile, flows on the Natural Gas Pipeline Co. of America, Gulf South, Channel Industries and Texas Eastern pipelines are expected to see increased utilization rates over the next decade, the first three of which could approach 100% by 2030, according to Wood Mackenzie. Once local demand is met, then northbound flows on HPL, Trunkline and KM Texas pipelines also would increase.

As such, Wood Mackenzie sees “a need for building capacity between Katy Hub and HSC or Agua Dulce and HSC...or building to Louisiana.”

BTU Analytics shared similar views earlier this month during a webinar in which Tony Scott, managing director of analytics, said the lack of connectivity between major supply regions and the second wave of LNG projects could create volatility during periods of strong demand. If pipeline development were to fail to keep pace with the second wave LNG buildout, “$5 gas is not out of the question,” he said.

Kinder Morgan is mulling another pipeline designed to carry Permian molecules to market. Permian Pass, a proposed 2 Bcf/d pipeline, would more directly target LNG terminals along the Sabine River. Tellurian Inc. is proposing the Permian Global Access, a 625-mile pipeline which would carry West Texas gas to Lake Charles, LA, and feed its not-yet-sanctioned Driftwood LNG terminal in Calcasieu Parish, LA.

Meanwhile, Enterprise Products Partners LP plans to expand and extend its Acadian gas system in Louisiana to deliver up to 2.1 Bcf/d from the Haynesville Shale to the Gulf Coast export market. As designed, an 80-mile-long pipeline would move gas from a point near Cheneyville, LA, on the Acadian Haynesville Extension, to third-party interconnects near Gillis, LA. The pipe would link to multiple pipelines serving LNG export facilities in South Louisiana and southeastern Texas. The Gillis Lateral would have 1 Bcf/d capacity.