Making good on its comparisons to Saudi Arabia in terms of natural energy resources, the Marcellus Shale has been making its heft felt on the Northeast region’s pipelines, wreaking havoc with traditional basis on lines such as Tennessee Gas Pipeline.

The capacity constraint-induced price distortion started happening in earnest in Tennessee’s northeastern Zones 4, 5, and 6 after the Fourth of July weekend as production continues to grow from the play.

Tennessee’s mainline from the Southwest splits in Western Pennsylvania into the 200 and 300 lines, which parallel each other flowing west-to-east until they reconnect in western New England. But only Line 300 travels through the heart of the Marcellus development in Pennsylvania; Line 200 runs farther north through New York state, also touching on the Marcellus, but it’s in an area that so far has not been developed.

For August averages there was approximately a 42-cent differential between prices on Tennessee’s Line 200 and Line 300 in the pipeline’s Zone 4, with Line 200 fetching the premium. In Zone 5 the Line 200 premium was about 23 cents. And in Zone 6 the Line 200 premium was about 34 cents.

Recently Tennessee Zone 4 was seeing a price range of $2.35-4.21, and Line 300 hit a bottom end of $2.25 — by far the market’s lowest recent pricing — on the trading date of Aug. 30. Only three months ago the Zone 4 range was a mere $4.88-5.10.

For a Northeast utility buyer, it would be nice to get those Line 300 low prices, but he told NGI it was unavailable because the utility doesn’t have transportation capacity there. However, he reported buying relatively cheap Marcellus gas delivered via Tennessee by suppliers that do hold the necessary capacity rights.

Besides the price divergence between the two lines in the spot market, the forward basis market is indicating a differential going into next year.

“What we have is very rapid production and development in a very concentrated area, which unfortunately is on the very smallest pipe that exists in Pennsylvania,” Rodney Waller, Range Resources Corp. senior vice president, told NGI recently.

Four counties in northeast Pennsylvania accounted for about 65% of Marcellus production last year, he said. Add to that two counties in southwest Pennsylvania — Washington and Greene — that accounted for 23%, for a total of 88% of the play’s production coming out of six counties, Waller observed. “So anytime you have that much concentrated development, you’re going to outgrow the infrastructure.”

Because of the evolution in the market caused by the growing Marcellus production, NGI is splitting its price index for Tennessee Zones 4, 5 and 6, each into two segments: one for the Line 200 and one for the Line 300 (see NGI‘s Price Notice). This will more accurately reflect the price differences. Besides reflecting lower prices, the capacity-constrained Line 300, where gas appears to be backing up at key receipt and delivery points, demonstrates much wider spreads in daily reporting and much more volatility, day-to-day.

Tennessee parent El Paso Corp. is seeking to remedy the situation.

Tennessee is upgrading its existing 24-inch diameter Line 300 by constructing five 30-inch diameter pipeline loops and modifying four compression stations. The company’s 300 Line Project is currently under construction and involves installation of seven looping segments in Pennsylvania and New Jersey totaling about 127 miles of 30-inch diameter pipeline, as well as the addition of about 55,000 hp of compression. “Upon completion Tennessee expects that the project will increase natural gas delivery capacity in the region by approximately 350,000 Dth/d,” the company said.

The pipeline’s Northeast Upgrade Project, currently in the permitting stage, would allow an additional 636,000 Dth/d to be transported on Line 300 in Pennsylvania and delivered to markets in the Northeast. “The Northeast Upgrade Project, along with the company’s 300 Line Project, will add about 1 Bcf/d of new firm transportation capacity…to key Northeast markets,” according to Tennessee’s website.

Tennessee also has the proposed MPP Project, slated to enter permitting this fall, to provide about 240,000 Dth/d of incremental firm capacity from the developing production region along its Line 300 to serve established markets, including those in the Northeast, the company said. The MPP Project is separate from the 300 Line Project but is a complement to it.

According to Tennessee, its Northeast Supply Diversification Project, currently in the permitting phase, will provide up to 250,000 Dth/d of incremental firm capacity from the Marcellus region along Line 300 to serve existing markets in New England and the Niagara Falls, NY, area.

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