Editor & Publisher, Marcellus Drilling News (MDN)
New Marcellus pipelines are coming online and, as the demand for natural gas increases, natural gas prices are starting to come up as a result.
What a difference a few pipelines can make. Last week the U.S. Energy Information Administration (EIA) issued their Natural Gas Weekly report (excellent report, great overview of the industry at large). One of the brief articles included in last week’s EIA update was story about the “basis differentials” for the Marcellus, and how they’ve narrowed. Basis differential means “how much does the gas trading at a given location trade above or below the standard Henry Hub price.”
For example, last summer gas trading at Transco’s Leidy Hub in the Marcellus was trading for $1.65 million British Thermal Units (MMBtus) below the Henry Hub price. In December, the gap had narrowed and Transco Leidy Hub prices were, on average, trading around 89 cents/MMBtu below the Henry Hub price. That’s a vast improvement in just six months.
Why the narrowing in trade price? New pipelines came online in the latter half of last year, carting Marcellus Shale gas to new markets. More demand (i.e. new markets) equals a bump up in price.
Basis differential narrows in Marcellus
At the Marcellus-shale area trading points, natural gas prices normally trade well below the Henry Hub national benchmark price because of the area’s high gas production and limited pipeline takeaway capacity.
The difference between the Marcellus pricing points and the Henry Hub, commonly referred to as the basis differential, has narrowed somewhat in recent months as new pipeline projects have come online and consumption of natural gas for heating has ramped up.
While prices in the region are still very low, trading under $1.50 per million British thermal units (MMBtu), since November they have moved somewhat closer to the Henry Hub price. The price at Transco’s Leidy Hub, for example, has averaged 89¢ below the Henry Hub since December 1. In July of 2015, on the other hand, the differential was much larger, averaging $1.65/MMBtu for the month.
In recent months, several new pipeline infrastructure projects and expansions have begun operation. For example, Texas Eastern Transmission Company’s (Tetco) OPEN project added 550 million cubic feet (MMcf/d) of pipeline takeaway capacity out of Ohio and began full service in early November 2015.
Other recent pipeline additions include Columbia Gas Pipeline’s East Side Expansion, a 310-MMcf/d project that flows natural gas produced in Pennsylvania to Middle Atlantic markets; and Tennessee Gas Pipeline’s Broad Run Flexibility Project, a 590-MMcf/d project originating in West Virginia that moves natural gas to the Gulf Coast states.
Transco’s Leidy Line project also began service in December, and flows gas from the Marcellus to Transco’s main pipeline extending from Texas to New York. Bentek Energy noted that the effect of these new projects was somewhat limited in November, but as heating consumption increased later in 2015, Northeast production (which includes Marcellus) increased as well, setting records in December. Bentek estimated production from the Northeast came close to 22 Bcf/d in December.
Here’s a helpful chart that went along with the above narrative on Marcellus pipelines:
Editor’s Note: This week’s report also included some other good news. The first thing that got my attention for example, was this updated chart, which shows how the Marcellus Shale formation continues to be the biggest kid on the block, despite everything negative from the doomsayers and malcontents panting for a collapse:
It really jumps out at you, doesn’t it? Marcellus Shale production in November, 2015, was up 4.3% over a year earlier and was greater than that of the four next biggest plays (the Eagle Ford, Haynesville, Barnett and Utica) combined. That’s astounding.
Moreover, there were these tidbits (emphasis added):
U.S. consumption of natural gas increased by 17% compared to the previous report week, led by an increase in the residential/commercial sector. Residential/commercial consumption increased by 33%, as colder temperatures increased the heating load. Consumption in other sectors increased as well; consumption for power generation increased by 3%, and industrial consumption increased by 5%. Exports to Mexico grew by 8%, exceeding 3 Bcf/d during most of the report week.
According to data from Bentek Energy, natural gas supply this week increased week-over-week, with increases from all sources of supply. Dry natural gas production increased by 2%, with Northeast production growing over the report week. Imports of natural gas from Canada increased by 17%. The increase in imports was driven by the Northeast region. Last week, in the Northeast, the United States exported more gas to Canada than it imported. This report week, the United States imported more gas than it exported to Canada, with U.S. net imports of gas from Canada in that region averaging 0.9 billion cubic feet per day (Bcf/d) over the report week. Liquefied natural gas sendout remained at minimal levels.
Consumption is up much more than production, which is precisely what is bound to happen in a market-driven commodity business where lower prices yield less production that, in turn, yields lower supplies ultimately leading to higher prices. The market is correcting itself and adjusting to the needs and wants of consumers, as it should.
Note, too, that imports from Canada were up for last week – the minute it turned cold – and there’s a lesson there for all those status quo New Englanders who still believe they don’t need to worry about gas supplies. Yes, they could use some Marcellus pipelines and all it takes is a slight drop in temperature to prove it.