Natural gas pipeline constraints are easing in the US Northeast as its traditionally high-demand winter heating season approaches, with new infrastructure coming online and better positioning operators to move Appalachian Basin supplies out of the region, according to an S&P Global Platts market outlook released Tuesday.
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The balancing of supply and demand will help keep a lid on prices over the long term, though there still may be volatility during the coldest months even under normal weather conditions if stockpiles in storage together with existing output are not enough to keep up with consumption.
Researchers and analysts gathered Tuesday at Platts' Houston Energy Forum highlighted the importance of being able to move more gas from key producing areas to market as demand increases for exports to Mexico via pipeline and as LNG shipments to other countries via tanker.
Pipeline operators, producers and midstream companies will be issuing their own winter forecasts over the next several weeks as they report third-quarter financial results.
"The constraints we have had in the past are kind of behind us, and we feel we will be able to get the gas out of the market to the Southeast and also to the Midcon," Beth McKay, manager, North America natural gas, for Platts' PIRA Energy Group, said at the forum.
The Northeast for several years has been impacted by pipeline capacity constraints, which occur when pipelines reach their upper flow limits and must therefore curtail, in certain cases, significant nominated quantities.
This in effect reduces the optionality for where gas from the region may flow, and adds a risk discount to the price of gas as buyers devalue a product that's not guaranteed to be delivered.
This has been a primary driver behind deep price discounts at US Northeast supply pools in recent years, and has been on full display this month. Next-day gas at the Tennessee Zone 4-300 leg, for example, settled at just 62 cents/MMBtu for gas day Tuesday, a discount of $2.185 to benchmark Henry Hub, data compiled by Platts Analytics' Bentek Energy show.
ANOTHER 4.57 BCF/D OF TAKEAWAY CAPACITY
Adding further pipeline capacity, in particular to the Northeast's outflow corridors, has the effect of de-bottlenecking existing pipeline constraints, but only to the extent that the new capacity does not fill one-for-one with incremental production volumes.
Should a new production-takeaway pipeline fill immediately with incremental production, existing pipeline constraints would find no relief.
That is not expected to be the case this winter and generally going forward for the region, however.
Producer guidance and current drilling activity in the Northeast region indicate that pipeline capacity additions in the near future are likely to fill with a mix of new production and existing volumes, thereby pulling volumes away from existing constraint corridors.
As a result, basis futures at Dominion South are seen tightening significantly through the upcoming winter, with the November-March contract strip last trading at a 58.5-cent discount to Henry Hub, according to data from the IntercontinentalExchange.
By the end of the winter season, an additional 4.57 Bcf/d of regional takeaway capacity is scheduled to enter service across three major projects, including the 520 MMcf/d Access South and Adair Southwest projects on Texas Eastern Transmission, the 1.5 Bcf/d Leach XPress project on Columbia Gas Pipeline, and the rollout of the remaining 2.55 Bcf/d of capacity on Rover Pipeline, which began flowing 700 MMcf/d of its total 3.25 Bcf/d of design capacity in September.
At the same time, production forecasts by Platts Analytics show production growing at a lesser rate than pipeline capacity additions, implying underutilization and therefore de-bottlenecking of existing constraints.
Production is forecast to grow from an average 24.9 Bcf/d in September this year to a winter-ending average of 27.3 Bcf/d in March 2018, an incremental 2.4 Bcf/d of production from the region.
Due to a massive wave of pipeline expansions on the horizon, the region is expected to continuously produce at volumes less than regional takeaway capacity accumulations.
An estimated 12.8 Bcf/d of pipeline expansions are scheduled to enter service over the course of 2018, while production is forecast to grow by about 2.6 Bcf/d over that period.
However, many of the pipeline projects scheduled to enter service next year so far have not received Federal Energy Regulatory Commission approval or begun construction, putting some risk around the total capacity added by the end of 2018.
In a research note Monday, Societe Generale analyst Breanne Dougherty said her firm was bullish on US natural gas prices in the near-term with a forecast for the first quarter of 2018 at $3.48/MMBtu and second quarter 2018 at $3.27/MMBtu.
However, she said Societe Generale sees renewed downside pressure in 2019/2020, pushing Henry Hub prices back below $3/MMBtu.
Platts' price forecast, too, is bullish in the short-term, but moderating over the longer term.
"We expect based on normal weather that these prices aren't high enough to motivate the producer community," McKay said. "We have already seen rig counts level off and drop a little bit."