A fierce interregional battle is set to rage by June, when the Rockies Express Pipeline (REX) East, carrying up to 1.6 Bcf/d, completes its march into Lebanon, OH. REX East will face an onslaught from Midcontinent shale and tight gas production as well as Appalachia’s Marcellus Shale, Evergreen, CO-based Bentek Energy LLC said Tuesday.

“These supplies will move into the Northeast market regardless of producer budget cuts due to the recent financial crisis,” said Bentek Managing Director Rusty Braziel. “Rockies producers are the largest holders of firm capacity on REX, and these companies can be expected to utilize 100% of the pipeline capacity to move their gas toward more lucrative markets in the Northeast. Unfortunately, neither the pipeline delivery capacity into the region nor the demand growth in the Northeast is adequate enough to absorb all of these new supplies.”

The Northeast market is by far the largest and most dynamic regional natural gas market in North America, served by a network of interstate pipelines, local distribution companies and one of the highest concentrations of gas storage in the world, Bentek noted. Its attractive market encouraged the development of REX and other pipeline expansions that want to target the historically high prices in the region.

However, the ability of these supplies to flow west to east is constrained by pipeline capacity, particularly during the winter peak demand season, said the consultant. Even if sufficient additional pipeline capacity is built, the rate of demand growth in the Northeast is limited, not nearly enough to absorb the incremental more than 5.0 Bcf/d that could be available to flow eastward by 2011.

“We expect to see a traffic jam of huge proportions, with no immediate solution on the horizon to alleviate the gridlock,” Braziel noted. “To some extent, the pricing pressures experienced by Rockies and Texas producers will move eastward into Northeast pricing hubs that have traditionally enjoyed premium pricing. With additional infrastructure construction being completed and new projects coming on-line over the next few years, we expect to see significant volatility in regional price differentials for a while to come.”

The start-up of the Millennium Pipeline in the last three months of this year should provide a preview of upcoming market shifts, said Braziel.

Millennium is the first major interstate pipeline project to be brought on-line in the Northeast in nearly 10 years, and it is expected to add significant delivery capacity into a region that is pipeline-constrained to flow volumes further east of Leidy, PA (see Daily GPI, Oct. 30). Millennium supplies would put downward pressure on several premium Northeast markets, tightening spreads between upstream markets and key pricing hubs at Texas Eastern (TETCO) M-3, Algonquin citygate, Iroquois Zone 2, Transco Zone 6-New York City (NYC) and Transco Zone 6 non-NYC, according to Bentek.

“Perhaps the biggest winners in this coming supply-demand market imbalance will be the holders of firm pipeline transportation capacity eastward from the constrained areas around Lebanon on TETCO, Dominion and TCO (Columbia Gas),” Braziel said. “Appalachian producers, accustomed to moving supplies eastward on an interruptible transportation basis, will be required to sell increasingly to holders of firm transportation or to acquire firm transportation to ensure their volumes won’t be curtailed.”

Bentek examines the impact of the anticipated market imbalances and gas flows and price implications from the date the REX East pipeline goes into service and beyond in a series called “Catch the Wave.” Bentek also launched the “Northeast Observer,” which provides updates on market developments.

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