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November 9th, 2012

Natural Gas ‚?? Surplus or Shortage For New England?

by Andrew Price, President & COO

Although the United States is awash in natural gas, New England is facing an unexpectedly constrained supply situation this winter. Pipeline infrastructure requires enormous capital investment; intrastate networks that deliver into New England have not had sufficient time to accommodate the vast new natural gas discoveries in the Mid-Atlantic US. Traditional sources of supply for northern New England, including the Sable Offshore Energy Project (Sable) in the waters off Nova Scotia, are not producing at expected levels. As a result New England consumers are stuck paying very high “basis” costs and are not realizing the full benefit of historic low natural gas commodity prices.

By now everyone knows that new extraction techniques, including directional drilling and hydraulic fracturing, have opened up huge domestic resources of natural gas. The biggest worry of natural gas producers these days is that supply will continue to outstrip demand, resulting in persistent low commodity prices. Certain exploration and production companies advertise that their cost to deliver natural gas into the pipeline system from the Marcellus Shale formation in Pennsylvania is as low as $2/MMBtu, well below the benchmark New York Mercantile Exchange (NYMEX) natural gas contract which is trading at $3.54/MMBtu this morning.

Unfortunately, this wealth of natural gas is not currently deliverable into New England in sufficient quantities. As a result, New England pays a high “Basis” price. Basis is the cost differential between the point of use and the Henry Hub in Louisiana, a physical intersection of pipes that is the delivery point for the NYMEX natural gas contract. In very simplified terms, Basis can be thought of as the transportation cost to bring natural gas from the wellhead, where it comes out of the ground, to the local distribution company (LDC). Basis costs do not include LDC delivery charges, the cost to deliver natural gas - in lower pressure interstate pipelines - the proverbial last-mile to the consumer.

The direction of flow on the Maritimes and Northeast Pipeline (M&NP) and the Portland Natural Gas Transmission pipeline (PNGTS) is north to south. (see map) These lines are not designed to bring plentiful gas from the Mid-Atlantic into northern New England. Instead they are designed to flow gas from Canadian resources into southern markets. Flow south on M&NP has been averaging only 100,000 to 300,000 MMBtu per day as of late, well below the line capacity of more than 800,000 MMBtu per day. This reflects lower than expected production at Sable Island as well as continued delays in bringing Encana’s new $1 billion Deep Panuke (pictured) offshore natural gas field online. Lower send-out from Repsol’s Canaport LNG facility in New Brunswick has also had a detrimental impact; domestic natural gas prices remain low relative to other LNG markets in Europe and Asia making it uneconomic to bring LNG to the US in significant quantities. 

Is there help on the way? Deep Panuke is expected to inject between 100,000 and 300,000 MMBtu per day into the M&NP pipeline after it comes online – currently targeted for late 2012 or early 2013. Significant shale resources exist in New Brunswick Canada that are currently being explored. If developed these shale plays may yield significant additional supply for injection into M&NP – although the timing of any new shale project in New Brunswick is highly uncertain. Pipeline projects, including Spectra Energy’s Algonquin Incremental Market (AIM) project is expected to bring up to 400,000 MMBtu per day of additional supply from the Marcellus into southern New England by November 2016. The AIM project is a continuation of nearer term pipeline projects that will help bring Marcellus gas north into the New York and New Jersey market. Together, these new pipeline projects may reduce the backlog of as many as 1,500 shale wells have been drilled but not completed due to a lack of adequate pipeline capacity to bring the natural gas to market. Expansions on Kinder Morgan’s Tennessee Gas Pipeline and Unitil’s Granite State Pipeline – both of which also bring gas from south to north into and within New England – would also help reduce New England Basis prices. 

I believe that natural gas commodity prices are likely to remain very attractive for consumers for many years to come. In the near term, however, it looks like New England will continue to pay high Basis prices as the region struggles to bring new pipeline infrastructure and in-region supply projects online.

 (Tags: Sable Offshore Energy Project, Deep Panuke, Natural Gas, Basis, Maritimes & Northeast Pipeline, Portland Natural Gas Transmission, Granite State)

 

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