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More Pipes, Rock-Bottom Prices Narrow Differentials Across the Grid

Natural gas price gaps among different North American regions are narrowing as the recent surge of major pipeline expansions has opened bottlenecks and leveled the supply playing field. Sources indicated that some spreads will grow again when heating season arrives, but for the foreseeable future near-parity numbers will remain the general norm across the North American spot market.

Except for a few Northeast locations along with the Florida and PG&E citygates, all NGI daily indexes on the Sept. 8 trading date were within about 15 cents or so on either side of $2.50. Fairly homogeneous price movement across the market since then has resulted in little change, with the subsequent Friday (Sept. 14) averages seeing a large majority of points within 15 cents up or down from $2.95.

SunTrust Robinson Humphrey analyst Cameron Horwitz saw an interesting development in the market shift: "You had this pipeline buildout to access premium markets, and now they're not so premium any more." He was primarily referring to such projects as Rockies Express Pipeline (REX), which were meant to allow Rockies supplies -- previously the "poor boy" section of the overall market -- to access the more lucrative markets of the Midwest and Northeast.

However, such markets aren't as lucrative -- both literally (in light of much lower gas prices compared to last year's spikes) and compared to other areas -- as they used to be. Northeast prices Friday (Sept. 11) in the $2.80-2.90s weren't all that far above Rockies quotes averaging in the low to mid $2.60s.

Horwitz noted that such projects as REX had "taken some bottlenecks out of the system" in the Rockies and Midcontinent and were allowing a lot more gas to flow east to higher-demand areas, especially the Northeast. He also observed "some storage dynamic, especially in the Gulf Coast." Gas can't be stored on the Gulf Coast now due to storage constraints, so it must be taken somewhere else, and that is also flattening the basis across different hubs, he said.

Near-parity pricing across the market also could be tracked to declining drilling activity in general, Horwitz said. He didn't see much effect from liquefied natural gas (LNG) imports, which he said have only averaged about 1 Bcf/d in recent weeks. A little less than a year ago, the demand downturn for LNG was overestimated in the rest of world, especially in Asia, he said. The drop in foreign demand wasn't as acute as expected, so the United States is not as much of a sink for LNG as previously expected, he said.

The analyst said he expects to see larger basis differentials return when the heating season begins, "but not as much" as usual. Before Nov. 1, however, he sees "a lot of uncertainty in the market due to the near-full storage situation."

NGI price archives show that over the last 10 years Opal, which is in the Rockies, traditionally one of the lowest-priced index points, has averaged roughly $4.50, from a low of 12 cents to a high of $13.61. On the other hand, long-time premium location Transco Zone 6-New York averaged $6.80 in a $1.99-44.81 range. The average differential is $2.30 over that period, but the two points got as far apart as $39.60 on the trading date of Jan. 14, 2004.

There have been other large Opal-Transco Zone 6 spreads in the past: such as nearly $29 in January 2001, $33 in February 2007 and $31 in January 2008. In the first instance, the differential from Christmas 2000 through early January 2001 widened rapidly from about $2.30 to nearly $29. In most winters since 2000 basis has widened appreciably for short-lived durations, usually during periods of especially cold Northeast temperatures.

This year, in Sept. 4 trading for the Labor Day weekend there was just a 21-cent gap between Opal and Transco-Zone 6, which was down from 25 cents a day earlier. Tight overall basis may have been common recently, but these things tend to be cyclical; 10 years ago in fall 1999 the differential of 20-40 cents wasn't far off from today's numbers.

Growing Southeast production in the Haynesville, Fayetteville and Barnett shale plays has been putting pressure on Henry Hub prices, which has helped to flatten basis, said Bentek Energy analyst Rocco Canonica. In addition, recent pipeline start-ups and/or expansions such as Midcontinent Express, Gulf Crossing and Gulf South have been greatly enhancing market options for Midcontinent and some Gulf Coast supplies, he said.

Prior to those pipeline expansions, there was a "great divide" in transport running north-south roughly along the Mississippi River, Canonica said, but "now there's a lot more openings west-to-east." He also counts himself as among those expecting basis differentials to widen again, at least temporarily, after the upcoming heating season begins.

Producing Region storage is "darn near full" and should reach a new peak shortly, Canonica said. Bentek calculated late last week that there is about 250 Bcf of available remaining storage capacity in the Gulf Coast region out of a total of 1,351 Bcf.

In March of last year Bentek identified 40 infrastructure projects in the Southeast/Gulf Coast region that would shift natural gas flow patterns between then and the middle of 2009, and "disrupt regional pricing relationships and realign the value of transportation capacity across the most complex pipeline grid in North America" (see NGI, March 31, 2008). The analysis said 25 gas pipeline projects, 11 storage projects and four LNG terminals were in the mix. "Major gas industry players have projects in the Gulf Coast area under construction, including Boardwalk Pipeline Partners, CenterPoint Energy, Enbridge, Energy Transfer Partners, Enterprise Products Partners, Kinder Morgan, Plains All American Pipeline, Spectra Energy and others," Bentek said.

Presumably, because of numerous recent restrictions on interruptible injections, firm capacity constitutes most of the total still-available storage space. That has been confirmed by anecdotal remarks by utility buyers.

A Texas-based marketer cited generally mild weather this summer as another factor in near-parity pricing, saying it had leveled off demand across quite a few areas. In addition, pipe expansions, especially out of the Rockies, have depressed basis spreads to the Gulf Coast, he said.

Independent energy analyst Pat Rau, noting that the final stage of REX through Clarington, OH, is expected to be completed by Nov. 1, said REX already has had a major impact on basis, not only in the Rockies but also in the Midcontinent, and Gulf Crossing came online in the first quarter of 2009.

"One of the reasons basis numbers have been converging across the country is simply because gas prices have fallen so sharply," Rau said. "When gas prices decline, basis tends to shrink toward transportation costs. So that would move the various basis differentials around the country closer in line as well."

A few other recently completed Gulf Coast pipeline projects besides Southeast Supply Header are Texas Gas Transmission's expansion into the Fayetteville Shale in Arkansas and the Carthage-to-Perryville Pipeline (see Daily GPI, June 30). Other pipes expected to be completed in the next two years include El Paso Corp.'s Ruby Pipeline from the Rockies to the Pacific Northwest.

Rau said the bottlenecks are emerging in the key shale plays, namely Haynesville in northeast Louisiana/East Texas; Fayetteville in Arkansas; Woodford in Oklahoma; and Marcellus in West Virginia through Pennsylvania and southwest New York.

REX going into Clarington is also causing several smaller projects to be proposed that would originate in Clarington, such as the Transco Rockies Connector, REX-Northeast Express and National Fuel Gas's W-E Appalachian Lateral, Rau said. "The Rockies doesn't have much shale gas, but they do have tight sands and CBM [coalbed methane] stuff that continues to grow. Ruby, Pathfinder, Bison and Rockies Alliance Pipeline have all been proposed, but I think the market is mostly looking forward to Ruby. Haynesville is the fastest growing production area in the U.S. right now, but several lines have been built or are being built in and out of Carthage, TX."

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