“U.S. natural gas prices escaped a rout this summer as record heat helped reduce towering inventory levels. This winter, fierce cold will be needed to help absorb the newest barrage of supply that will again test the limits of an over-supplied market. Up to $3 billion worth of new pipelines connecting to the Marcellus Shale formation in the U.S. Northeast could unlock the equivalent of five percent of daily U.S. natural gas supply in the last months of this year and in 2013 that until now has been trapped without access to consuming markets.
The new lines are another sign of how prolific new production continues to transform the U.S. gas market nearly five years after drillers began to aggressively tap shale deposits, presenting a fresh challenge for a network whose demand is struggling to keep up with supply.
New output, which will depend on how willing producers are to send more gas to market, will make the Northeast much less reliant on gas from the Gulf and Canada as well as the Rockies, potentially altering flows of gas and changing the spreads between next-day gas prices in different regions such as New York and the national benchmark Henry Hub in Louisiana. Output from the Marcellus - a rich seam of gas-bearing rock that straddles Pennsylvania, New York, Ohio and West Virginia - has jumped nearly ten fold since 2009, flooding pipelines and playing a central role in pushing futures prices to ten-year lows earlier this year.
About ten projects coming online in the next three months alone will add an extra 3 billion cubic feet per day (bcfd) of pipeline capacity, according to government data. Another 5 bcfd of projects are in the works for 2013, at least. Barclays analysts see an additional 1.8 bcfd flowing from the Marcellus by the end of 2012 and an additional 3.4 bcfd in 2013, together adding about 8 percent to the 65 bcfd of total U.S. output, according to a recent report.
"Historically, pipelines were built to move gas from West to East, but now the production increase is in the East. There will certainly be displacements of gas with these new pipelines," said Anthony Yuen, analyst with Citigroup in New York.
Rocketing output from Marcellus is forcing pipeline operators to rethink plans, as the Northeast, a high-paying market due to its cold winters and hot summers, becomes increasingly self-reliant.
Williams Cos, owner of the Transco pipeline which ships gas from the Gulf Coast to the Northeast, is expanding pipeline capacity out of the Marcellus to provide additional flows along its system to meet demand on the Eastern seaboard, the company's chief executive Alan Armstrong said in an interview.
This will involve reversing some infrastructure to allow for southbound flows. Williams has plans for a network of pipes that by 2015 will ship gas from the Marcellus to New York City, Long Island and areas further south in Maryland and Virginia, according to a recent report on the company's website. "The system is not designed to backflow and we are spending some money as part of that project that will allow us to flow gas back past that point," said Armstrong, referring to a processing unit on the Pennsylvania-Maryland border. Kinder Morgan's <KMI.N> Rockies Express pipeline, which came online in 2004, was seen as a much needed vein running from rich gas deposits in the West to needy markets in the East. But flows to Ohio along REX have shrunk over the past year, analysts said, a trend they expect to continue.
Gas prices across the country have converged as new production comes online, thinning the margins for parties transporting gas across the country. Pipeline operators and shippers already have to find more lucrative markets for their gas, such as California, where prices are currently the highest in the country due to late summer heat.
Northeast gas prices, historically prone to winter spikes, have seen some pressure from increased supply in the Marcellus. Last winter saw the tamest price leap in recent years, in part due to mild weather.
Prices between the New York citygate and Henry Hub, the nation's benchmark supply point, have run hand in hand over the past few months, with New York trading only 15 cents more than the Hub this summer, the smallest gap in more than a decade.
Price points closer to the Marcellus, which has been lower than Henry Hub due to supply constraints, have also showed signs of convergence.
Phil Flynn, analyst with Price Futures Group in Chicago, expects gas futures prices to again fall to $2 per mmBtu and cash prices in the Northeast to "rival last year's lows", especially if we see another mild winter. Henry Hub cash prices bottomed out at a 10-year low of $1.82 per mmBtuin late April, while New York citygate prices also fell below $2 in late April, their lowest level since 2001. Flynn said the biggest contributing factors to the expected drop off in prices are the new pipelines and the currently non-producing wells these pipelines will make accessible for natural gas extraction. Similarly, Canadian flows from the north could be restricted, given increased Northeast supply.