Tuesday, November 11, 2008
Northeast pricing premiums west of regional pipeline capacity constraints will experience significant downward pressure starting in June 2009. Appalachian producers may be among hardest hit.
HOUSTON (November 11, 2008) - A new Market Alert released by BENTEK Energy, LLC, details the potential market disruption expected to occur in June 2009 with the completion of the REX East pipeline into Lebanon, OH, an important supply gateway into the Northeast natural gas market. Upon completion of this leg of the REX system, approximately 1.6 billion cubic feet per day (Bcf/d) of Rocky Mountain natural gas will slam into Lebanon at the same time increased production from Mid-continent unconventional shale and tight sand gas is flowing east, and Appalachia producers are ramping up production from the Marcellus Shale.
"These supplies will move into the Northeast market regardless of producer budget cuts due to the recent financial crisis," noted E. Russell (Rusty) Braziel, managing director of BENTEK Energy. "Rockies producers are the largest holders of firm capacity on REX, and these companies can be expected to utilize 100% of the pipeline capacity to move their gas toward more lucrative markets in the Northeast. Unfortunately, neither the pipeline delivery capacity into the region or the demand growth in the Northeast is adequate enough to absorb all of these new supplies."
The Northeast market is by far the largest and most dynamic regional natural gas market in North America and is well-served by a network of interstate pipelines, local distribution companies and one of the highest concentrations of natural gas storage in the world. Such an attractive market environment has encouraged the development of REX and other pipeline expansions targeting the historically high prices in the region. However, the ability of these supplies to flow west to east is constrained by pipeline capacity, particularly during the winter peak demand season. Even if sufficient additional pipeline capacity is built, the rate of demand growth in the Northeast is limited, not nearly enough to absorb the more than incremental 5.0 Bcf/d that could be available to flow eastward by 2011.
"We expect to see a traffic jam of huge proportions, with no immediate solution on the horizon to alleviate the gridlock," Braziel observed. "To some extent, the pricing pressures experienced by Rockies and Texas producers will move eastward into Northeast pricing hubs that have traditionally enjoyed premium pricing. With additional infrastructure construction being completed and new projects coming online over the next few years, we expect to see significant volatility in regional price differentials for a while to come."
Braziel added that the start-up of the Millennium Pipeline during the fourth quarter of 2008 will provide a preview of upcoming market shifts. Millennium is the first major interstate pipeline project to be brought online in the Northeast for nearly 10 years. It will add significant delivery capacity into a region that is pipeline constrained to flow volumes further east of Leidy, PA. As a result, Millennium supplies are expected to put downward pressure on a number of premium Northeast markets, tightening spreads between upstream markets and key pricing hubs at TETCO M3, Algonquin City-gate, Iroquois Z.2, Transco Z.6 NY and Transco Z.6 non-NY.
"Perhaps the biggest winners in this coming supply-demand market imbalance will be the holders of firm pipeline transportation capacity eastward from the constrained areas around Lebanon on TETCO, Dominion and TCO (Columbia Gas)," Braziel noted. "Appalachian producers, accustomed to moving supplies eastward on an interruptible transportation basis will be required to sell increasingly to holders of firm transportation or to acquire firm transportation to ensure their volumes won't be curtailed."
To provide insight into these issues, BENTEK's exclusive three-part Market Alert series examines the impact of the anticipated market imbalances and gas flows and price implications from the date the REX East pipeline goes into service and beyond. BENTEK calls this Market Alert series "Catch the Wave™." The title refers to BENTEK's proprietary model identifying four regional "waves" of west-to-east capacity constraints and the resulting purchasing, sales and trading opportunities that will result as supply shifts move eastward.
In addition, BENTEK has launched the Northeast Observer™ to provide daily updates on market developments and a weekly comprehensive analysis of all market factors pertinent to the Northeast region. For more information about BENTEK's "Catch the Wave™" Market Alert series, go to www.bentekenergy.com or call BENTEK at 888-251-1264.
About BENTEK Energy, LLC
BENTEK Energy, LLC, is an energy markets information company based in Evergreen, CO. The company brings customers the analytical tools and competitive intelligence needed in order to make critical, bottom-line decisions in today's natural gas and power markets. Additional information about BENTEK Energy is available on the Web at www.bentekenergy.com.