It used to be that rising natural gas prices in the Northeast would lift those at the Henry Hub. Now, not so much. The traditional end-of-the-pipe markets in the Northeast have been connecting with new supply sources, which has diminished their influence on Henry prices, according to NGI‘s analysis.

From Dec. 13 through Dec. 27, the “Northeast Basket” of NGI‘s Algonquin citygate, Iroquois Zone 2, Tennessee Zone 6, Texas Eastern M-3 and Transco Zone 6-New York indexes averaged $10.82, versus just $4.17 for the NGI Henry Hub index over the same time period (see chart). That represents a 159% increase for the Northeast Basket versus what it averaged in the 10 trading days before Dec. 13.

Meanwhile, the Henry Hub index not only has failed to keep pace but also actually fell 4% from where it traded in the 10 days prior to Dec. 13. However, that is not necessarily an anomaly, at least when compared with historical data.

Since 2000 there have been eight instances when the Northeast Basket averaged at least $10/MMBtu for at least nine consecutive days, but the Henry Hub saw commensurate changes only half the time. Three of the four times when the Henry Hub failed to climb along with the Northeast Basket occurred when the basket remained above $10/MMBtu for 15 days or fewer, so that suggests Northeast prices have to be at elevated levels for a certain length of time before the Henry Hub responds in kind. In four of the five cases when the basket was above $10/MMBtu for more than 15 days, the Henry Hub also posted double-digit percentage gains.

The role that storage levels play in the relationship between the extreme Northeast Basket and Henry Hub prices also appears to be a function of time. In five of the first seven cases when the Northeast Basket was above $10 (not enough storage data exist for the most recent period), storage levels declined. However, in all five instances, the Northeast Basket remained above $10 for no more than 34 days.

The only two periods that saw sustained $10-plus prices in New England during periods of rising storage levels occurred in 2006 and 2008, when the Northeast Basket remained at double-digit prices for more than 100 days each. That suggests that other factors were at work, such as the impact of the rise in oil prices above $145/bbl in 2008 may have had on U.S. natural gas prices.

The question, then, is will sustained periods of high Northeast prices continue to lead to subsequent increases in Gulf Coast prices in the future? The problem is that historical data may no longer be a good guide because they do not fully account for three major changes in North American gas market that have occurred over the last two years: the completion of the Canaport LNG regasification facility, the completion of Rockies Express (REX) East, and the rise in production in the Marcellus Shale.

All three provide alternate sources of supply to the gas-starved Northeast and may very well prevent the Henry Hub from rising in lockstep with price surges in New England going forward.

Canaport marked its official opening as the first Canadian LNG regas facility in September 2009 after receiving its initial cargo from Trinidad three months earlier (see NGI, Oct. 19, 2009). The facility has 1 Bcf/d of baseload capacity with the ability to send out 1.2 Bcf/d during periods of peak demand.

Between mid-February and November 2010, Canaport experienced daily sendout volumes of 100-300 MMcf/d. However, volumes from Canaport surged to 400-700 MMcf/d in December. Canaport feeds gas directly into Brunswick Pipeline, which in turn connects with the U.S.-bound Maritimes & Northeast Pipeline system.

The $750 million Canaport facility is co-owned by Repsol (75%) and Irving Oil (25%). Canaport is the only Canadian LNG project to date that has 100% of its capacity backed by a long-term supply contract — Repsol has a 25-year contract for 100% of the regas capacity. Repsol has no dedicated supply sources for Canaport per se, opting instead to source gas based on price and availability of cargoes.

While Canaport does connect to co-owner Irving Oil’s refinery, which sits just five miles away, the main purpose of Canaport is to lead Repsol’s ongoing efforts to supply gas to the Northeastern United States. Repsol began selling gas to the New England area in 2008 after contracting in 2007 to purchase all the gas production from Encana Corp.’s Deep Panuke field offshore Halifax, NS. Eventually, Repsol hopes that Canaport and its other Canadian gas will supply 20% of the Northeastern U.S. gas market.

El Paso Corp. can attest to the impact that REX and growing Marcellus production are having on its operations. During its 3Q10 earnings conference call, El Paso executives noted that receipts into its Tennessee Gas Pipeline (TGP) from REX in Ohio and from production in the Marcellus Shale region were up a combined 1.3 Bcf/d year over year. That had the effect of displacing receipts into TGP from both Niagara and the Gulf Coast, the company told investors.

And producers in the Marcellus continue to grow their production. Last fall Range Resources Corp. said it expected to end 2010 with production of 200 MMcfe/d in the Marcellus and double that figure to 400 MMcfe/d by the end of this year (see NGI, Oct. 11, 2010).

El Paso officials said the company plans to pursue a revised rate structure for Tennessee Gas Pipeline to reflect these changes in gas flows, indicating that it believes increased receipts from both REX and the Marcellus are no passing fad.

REX became fully functional in November 2009 when the eastern portion of the system reached its endpoint in Clarington, OH. The pipeline has the ability to transport up to 1.8 Bcf/d of supply from the Rocky Mountains.

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