With as much as 13.7 Bcf/d of domestic natural gas pipeline takeaway capacity coming online in the first half of 2011, supply gluts are likely in the traditionally well-supplied areas of the northern Rockies (again) and the booming shale areas of Louisiana and Pennsylvania, a Societe Generale energy analyst said.
Laurent Key, who covers U.S. natural gas for the French investment bank, reviewed new pipeline capacity in the Southeast and found that gas prices will remain depressed as conventional gas supplies fight for market and more unconventional gas comes online. Societe Generale on Nov. 29 revised downward its 2011 price forecast to $3.56/MMBtu from $3.75.
"Over the last two years, rising output from the Haynesville and the Marcellus shale plays has created a double barrier for gas to flow from conventional producing areas (Midcontinent and Rockies) to the Northeast," Key said. "The first barrier is in northeastern Louisiana."
The start-up in late 2009 of two gas pipelines "helped to bridge the gap between the Midcontinent and the Southeast basis," he said. "Flows on the Mid-Continent Express and Gulf Crossing pipelines, which take gas from the northeast Texas/Oklahoma border down to northwest Louisiana, have displaced a Midcontinent supply glut, so it is now closer to both Henry Hub and premium northeastern consuming areas."
The second barrier "is in Pennsylvania, due to rising Marcellus production. This barrier was reinforced by the expanded Rockies Express Pipeline (REX East) in 2Q2010."
REX East so far has prevented "any new episodes of 2007-like Rockies congestion (when Cheyenne Hub price traded at almost $0.00 for two months)," but "it has consistently put downward pressure on the midwestern basis."
However, even if production remains flat, an oversupply of gas may be coming by next November, said Key.
"The question is, where are prices likely to repeat the 2007 experience of the Rockies?"
Key ranked "in the order of glut magnitude" the most likely locations and said it appears to be led by the Rockies once again, followed by northern Louisiana. The eastern locations, which are "closer to premium consuming markets" would be third.
Pipeline developments in the Southeast this year have focused on easing gas flows toward the East from the Haynesville Shale, "thus reinforcing congestion at the first barrier (northeastern Louisiana)," said Key.
Of significance to Key's forecast is the ramp-up this month of Energy Transfer Partners LP's (ETP) Tiger Pipeline, which added 2 Bcf/d of export takeaway capacity from the Haynesville Shale and Bossier Sands (see Daily GPI, Nov. 9).
For now the Tiger gas pipeline has only displaced flows on ETP's Regency Energy Partners infrastructure, which includes the Haynesville Expansion Project (see Daily GPI, May 12; Jan. 13). However, the Haynesville rig count has recently fallen but it's still above start-of-2010 levels.
"The Tiger is still sleeping," Key warned. "According to the Louisiana Department of Natural Resources, 477 wells have been drilled but not yet completed on the play, as of Nov 18."
The drilling costs of the uncompleted Haynesville wells already have been financed, Key noted. "According to Bentek Energy LLC, these wells will be cheaper to exploit than undrilled ones (even from oily plays) when prices come down next year."
Diversifying export routes from the Haynesville Shale by producers is "clearly justified by the fact that they sit on large volumes of cheap gas still untapped. But despite high price competitiveness, Haynesville exports are sandwiched between rising volumes out of the Fayetteville Shale in the North and future high flows in southern Louisiana, initiating from the Eagle Ford Shale..."
ETP also launched the Fayetteville Express Pipeline early this month, which added 1.5 Bcf/d of capacity, "which cuts the way north for Haynesville gas," he said. In South Texas the Eagle Ford Shale's dry gas is expected to start flowing as new gathering and transportation capacity comes online.
Before the end of the 2011 injection season, said Key, ETP's southbound Haynesville Extension should be online, offering a "strategic move" for producers because its 1.8 Bcf/d capacity would provide not only a second route from northwestern Louisiana to Florida but also a way to cut gas flows from South Texas (see Daily GPI, Nov. 23, 2009).
"Once the Tiger awakes in the Haynesville area, more Texas gas will remain stuck behind the first barrier, and previous efforts to bridge the gap between the Midcontinent and the Southeast may result in uniformly depressed prices over the entire southern producing area," wrote Key. "This depressed picture should eventually affect Henry Hub, since flows are likely to increase toward southeastern Louisiana with the changing price dynamic."
With more gas on its way to the Henry Hub, the New York Mercantile Exchange (Nymex) delivery point "will no longer be -- and actually is already no longer -- the balancing point between supply and demand. As a result, the Nymex curve should average even lower levels in 2011 than in 2010."
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