New Northeast gas pipeline projects may not breach traditional bottlenecks
By Samantha Santa Maria in Houston
August 29, 2012 - Even with more than a dozen gas pipeline projects going into service in the Northeast by year's end, volatility could still abound this winter, as these projects spread out the supply glut caused by rampant Marcellus Shale production without fully breaching the gas-hungry city-gates markets, traders and analyst sources said.
Some 3.5 Bcf/d of new incremental capacity is expected to come online by the end of the year, Platts analysis shows, all aimed at enhancing takeaway from Marcellus production fields. None of these, however, directly address any of the traditional bottlenecks or penetrate the city-gates.
In contrast, there has been a nearly 3.3 Bcf/d increase in Northeast production to 7.83 Bcf/d as of August 1, compared with the same time a year ago, according to data from Platts unit Bentek Energy.
These supply gains are led by a rampant increase in production out of northeast Pennsylvania — the dry, sweet spot of the Marcellus — which came in at 4.15 Bcf/d in early August, compared with its year-ago level of 1.83 Bcf/d, Bentek data shows.
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Analysts estimate total Northeast production could come in between 8 Bcf/d and 10 Bcf/d by year's end.
"This is like putting a band-aid on a fatal wound," an analyst at a producer's shop said. "Takeaway is playing catch-up to production again this year and all this means is volatility."
Alan Lammey, energy analyst with WeatherBell Analytics, added there is still far too much demand and still too little capacity for the market area. "You probably need 10 times more [expansions] than that to take a significant chunk out of the price spikes we see during those times of concentrated cold," Lammey said.
BNP Paribas Director Teri Viswanath agreed the Northeast could benefit from more demand-led infrastructure. "We're seeing a number of large pipes, but there is still a tremendous need for connecting to pockets of demand," Viswanath said. "Commercial consumers see and would like to take advantage of low-cost supplies."
One of the more distinct effects of this overwhelming number of new infrastructure projects, primarily being anchored by Marcellus producers, is increased and more frequent price bifurcation at Northeast pricing hubs, sources said. Effectively, intraday priced differentials between the lowest and the highest trade of the day could blow out as pipeline constraints kick, in preventing supplies from reaching the most downstream portions of some markets.
Bifurcation has traditionally marked constrained Northeast markets in cold winters, but as Marcellus supplies pile on with little improvements being made to traditional pipe constraints, price bifurcation is now evident during high-demand days in general, be it in summer or in the midst of a mild winter.
As recently as June 20, the lowest trade reported to Platts at Tennessee Gas Pipeline zone 6 was $1.50/MMBtu, while the highest was $9.60/MMBtu, an intraday differential of $8.10/MMBtu.
Greg Hopper, managing director at consulting firm Black & Veatch pointed to two upcoming projects as leading to increased bifurcation going forward.
Dominion's Appalachian Gateway, which would deliver more gas into Texas Eastern Transmission at Oakford, Pennsylvania, could "open up the spread at Tetco M-3," Hopper said.
"I think it would bifurcate during a low-demand period," Hopper added. "During periods of low demand, there's too much seeking too little."
Meanwhile, Millennium Pipeline's Minisink compressor project — which was supposed to have gone into service in November, but has since been delayed until March or April 2013 — would allow for more supplies to reach Algonquin Gas Transmission at Ramapo, New York, which is already a bifurcated market.
As recently as July 16, Algonquin, receipts, reported a low and high trade to Platts of $31.8/MMBtu and $6.75/MMBtu, respectively, for an intraday differential of $3.57/MMBtu.
Minisink would further split the Algonquin, receipts, market, Hopper said. "Where else is it going to go? There is some on-system market, which is not huge, but it's there."
Some of the projects, however, are targeting clear end-use markets. For instance, Transcontinental Gas Pipe Line's Bayonne Delivery Lateral, which went into service earlier this year, is supplying up to 250,000 Mcf/d to the Bayonne Energy Center, a power plant in New Jersey. Spectra Energy's Philadelphia Lateral, expected to come online late this year, would sent 27,000 Mcf/d to a power plant in that city.
By year's end, three expansion projects would enhance deliveries from the US, primarily from the Marcellus, into Ontario, presumably to fill the power generation gap as the province shutters its coal fleet.
Finally, addressing power growth in the mid-Atlantic market is the aim of the Mid-Atlantic Connector, which would add new pipe on the Transco system in the Washington, DC, metropolitan area.
Bentek noted in a report that total demand off Transco's pipe in the Virginia market has increased some 100,000 Mcf/d between January and May this year, compared with the same timeframe in 2011. Most of this growth, the analysts said, has come from the power sector.
But all these only account for less than half of the capacity coming online by year's end, a Platts analysis showed.
"If none of that stuff is penetrating [Transco zone 6-New York] or [Texas Eastern zone] M-3, then it is just enlarging the supply bubble," an analyst said.
Already, financial players are betting this bubble will exacerbate city-gates' premiums as rampant production weighs down Appalachian hubs.
Platts assessments Tuesday show the forward full-value premium for prompt winter held by Transco zone 6-New York over Dominion, South stood at $2.69/MMBtu. In contrast, the premium for last winter's packages went no higher than $2.46/MMBtu.
Financial traders primarily attributed the lofty premium this year to Marcellus supplies, which could weigh down the Dominion South Point.
Putting winter weather into the mix in the Northeast could provide even more bumps in the road, sources said. Meteorologists are expecting the upcoming winter to be slightly colder than normal in the Northeast, a far cry from the incredibly mild winter of 2011-2012.
Matt Rogers, president of Commodity Weather Group, said for now, the upcoming winter appears as through it will have a warm start and finish, similar to the winter of 2006-2007. "January's a big wild card right now," Rogers said. "Maybe you could call it a bipolar winter."
Viswanath warned the market could be setting itself up for a price shock. "The market has been lulled into false sense of security with the mild winter we had last year," Viswanath said. "If October and November are colder than last season, it could catch some of the market by surprise. That could cause some volatility."
Starting from next year, however, Viswanath said the nearly 5 Bcf/d of regional pipeline projects either under construction or in advanced planning should lead the Northeast delivery points to trade in closer parity to the production hubs, including the Henry Hub.
Next year, Spectra hopes to put in place its New Jersey-New York Expansion, which would alleviate the traditional chokepoint at Lambertville, Pennsylvania — the main culprit in the price bifurcation at the Texas Eastern zone M-3 market — and deliver supplies into downtown Manhattan.
Around 2015, said Wood Mackenzie's North American gas and power vice president Edward Kelly, expansions are planned to relieve the constraints in New England, where the highest prices in North America have been recorded for the year to date.
"There are likely to be constraints between Marcellus supplies and New England markets for several more years, at least, especially in the winter and summer peaks," Kelly said.
"Over the long run, we anticipate further contraction in regional basis differentials with reduced volatility given these physical expansions," Viswanath said.
Ken Beckman, president of IGC Consulting, agreed and said that with growing concerns from the electric sector regarding reliability, the rash of Northeast expansions are "simply going to improve the situation. To me, this is the ultimate answer for electric reliability."
But Northeast physical traders remain skeptical. A Marcellus trader said the expansions could boost prices for Marcellus gas, but that could lead to a "vicious cycle."
"I think prices will definitely rebound and come more in line with every other point we're seeing, and that will probably inspire some producers to increase production again and fill it up again," the trader said. "Every time there's an expansion project, it might alleviate the bottleneck for a few months, but then that bottleneck is going to come right back."
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