Nexus maintenance could add downward pressure on Appalachian cash basis

Fast-approaching maintenance on Nexus Gas Transmission, a key westbound corridor for Appalachian supply, will begin pushing back on flows starting next week. The prolonged cut to capacity could further weaken basis prices at upstream hubs, adding to recent pressure caused by the seasonal drop in gas demand.

Starting Oct. 11, westbound flows through Nexus' Hanoverton compressor station will drop to 950 MMcf/d, down from designed capacity at roughly 1.45 Bcf/d. Over the proceeding 14 days, capacity through Hanoverton will fall to as low as 815 MMcf/d, as the midstream operator conducts an integrity assessment of its pipeline system, including cleaning and in-line inspection tool runs.

Earlier this month, capacity through Hanoverton was already cut to 1.26 Bcf/d, putting downward pressure on flows, which have fallen to an average 1.15 Bcf/d over the past seven days. In the month prior, flows through Hanoverton had averaged about 1.3 Bcf/d, S&P Global Platts Analytics data shows.

The reduction in westbound capacity to the Midwest market-area comes just as weaker shoulder-season demand in the Northeast weighs on gas prices in Appalachia, driving more supply to neighboring markets.

Over the past week, basis prices at regional benchmark Eastern Gas South have fallen to as much as a $2/MMBtu discount to the Henry Hub – down from an 84-cent discount in September and a 46-cent discount in August, S&P Global Platts data shows.

The decline in basis prices has made Appalachian producers even more reliant on demand in neighboring markets. Over the past month, transmissions to the Midwest have averaged about 7.2 Bcf/d, up from average flows closer to 7 Bcf/d from June to August. Over the same period, flows to the Southeast have made a similar gain, rising about 250 MMcf/d in the past 30 days, compared with the summer 2021 average.

Outlook

In an outage notice published Sept. 27, Nexus warned shippers that the routine maintenance could require certain segments of the pipeline to undergo further inspection and investigation, potentially leading to further reductions in capacity. The operator advised, however, that any necessary further capacity reductions would be posted to the electronic bulletin board upon discovery.

The mid-October timing of the Nexus' pipeline maintenance aligns closely with typical shoulder-season trough in Northeast gas demand. Historically, Appalachian gas prices have fallen to annual lows from late-September to mid-October – often dipping below $1/MMBtu, S&P Global Platts data shows.

Even assuming no further capacity reductions on Nexus are required, the combined impact of weak demand and diminished egress capacity from Appalachia could put additional strain on the region's upstream hub prices. Given the overall strength in US gas prices, though, it's unlikely that Eastern Gas South would see prices fall much below $4/MMBtu.

In the forward market, balance-of-month prices at Eastern Gas settled most recently at $4.93, just 74 cents behind the Henry Hub. Earlier this month though, market concern over weak demand, and the upcoming Nexus maintenance, cut the balance-October contract to just $4.40 – more than $1.30 behind Henry Hub, S&P Global Platts' M2MS data shows.