Bloomberg News

Natural Gas Pipelines to Expand U.S. Supply Glut: Energy Markets

September 26, 2012

Natural Gas Pipelines to Expand U.S. Supply Glut

Shale gas has been key to the country’s move toward energy independence. Photographer: Julia Schmalz/Bloomberg

Natural gas pipelines coming into service by year end may boost deliveries from the Marcellus shale deposit in the U.S. Northeast by 30 percent, extending a supply glut that helped send prices to decade lows.

As much as 2 billion cubic feet of gas a day are set to flow from the lines in Pennsylvania, Ohio and West Virginia, bound for markets along the Eastern Seaboard, based on government and pipeline-company projections. About 1,000 Marcellus shale wells sit uncompleted, mainly because of a lack of pipeline infrastructure, according to the Energy Department.

Gas prices have dropped 60 percent since 2007 as producers used techniques such as hydraulic fracturing, or fracking, to reach supplies trapped deep in tight layers of shale. Gas futures tumbled to $1.902 per million British thermal units in April, the lowest price since 2002, as stockpiles ballooned during a mild winter and record U.S. production.

“There are new pipelines coming up and more Marcellus gas is going to flood storage going into winter,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said in a phone interview. “Unless you get a really cold winter, prices are going to be in the $2 range.”

Natural gas for October delivery rose 9.9 cents, or 3.4 percent, to settle at $3.023 per million British thermal units on the New York Mercantile Exchange. Prices have gained 1.1 percent this year.

The futures have averaged $2.679 since the April low after rising as high as $3.277. Prices may average $3.20 per million Btu during the first quarter of 2013, when demand peaks, based on the median of 18 analyst estimates compiled by Bloomberg.

Winter Demand

“Higher prices are all predicated on more normal space heating” this winter and demand from power generators burning gas instead of coal, Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a Sept. 21 interview. Viswanath expects first-quarter prices to average $3.60 per million Btu.

Cabot Oil & Gas Corp., which pumps gas from Marcellus deposits in Pennsylvania, has a break-even point that’s “probably below $2,” Chief Financial Officer Scott Schroeder said in a Sept. 14 interview from Houston.

About 4,525 miles of interstate gas pipelines serving consumers from Maine to Virginia have been put into service since 1996, Energy Department data show. About 693 miles of lines in the Marcellus, with a daily capacity of 8.06 billion cubic feet, are planned, under construction or already in service, according to Federal Energy Regulatory Commission data going back to 2006.

Fall Completions

New pipelines can quickly add 1 billion cubic feet a day of Marcellus gas to the market and as much as 2 billion, as projects with 3.5 billion cubic feet of additional pipeline capacity will be completed from September through December, Viswanath said. Marcellus gas output in May averaged 6.85 billion cubic feet a day, according to the most recent Energy Department data.

Shale gas has been key to the country’s move toward energy independence. Production gains helped the U.S. meet 81 percent of its energy demand in 2011, the highest level since 1992, according to U.S. Energy Department data compiled by Bloomberg.

Stockpiles in the week ended Sept. 14 totaled 3.496 billion cubic feet, 8.6 percent above the five-year average, the Energy Department said on Sept. 20. Supplies of gas may rise to a record 3.95 trillion by the end of October, before demand begins to rise with colder weather, according to department estimates.

Mid-Atlantic Lines

Spectra Energy Corp.’s (SE:US) Texas Eastern Transmission pipeline has a project that will go into service in November to carry 200,000 dekatherms (200 million cubic feet) a day from West Virginia to eastern Pennsylvania to connect to mid-Atlantic points, Brian McKerlie, vice president of business development at Spectra in Houston, said in a Sept. 19 interview.

Spectra is also building a pipeline to ship Marcellus gas to Manhattan by next November and is seeking customers to build a line to Florida, according to the company.

TransCanada Corp. (TRP), based in Calgary, is reversing its Niagara pipeline to start moving Marcellus gas from West Virginia into southern Ontario in November, Karl Johannson, executive vice president of natural gas pipelines with TransCanada, said in a Sept. 19 interview.

“It’s a very large resource and it’s going to change the flow of gas in North America,” Johannson said.

Williams Cos. projected that more than half of its estimated $11.5 billion of capital investments from 2012 through 2014 is in the Marcellus region, according to a Sept. 5 presentation by the Tulsa, Oklahoma-based company.

Rising Production

Kinder Morgan Energy Partners LP (KMP:US)’s Tennessee Gas Pipeline and a unit of Dominion Resources Inc. also have Marcellus projects under construction.

Marcellus will account for 22 percent of the 79 billion cubic feet a day of U.S. gas output in 2016, or about 17.4 billion a day, according to Goldman Sachs Group Inc. estimates. The region accounted for 5 percent of output last year and none in 2006, the bank’s data show.

Barclays Plc estimates that additional pipeline capacity may boost daily U.S. supplies by 1.8 billion cubic feet by the end of this year and by another 3.4 billion in 2013, the majority of it from Marcellus.

“We will be watching for evidence of a large uptick in production” in November, March and November 2013, Shiyang Wang, a Barclays analyst in New York, said in an Aug. 28 report.

Winter Demand

Laurent Key, a natural gas analyst with Societe Generale in New York, predicts that 900 million cubic feet a day of Marcellus production will come online in the fourth quarter, according to a Sept. 10 note to clients. Key’s first quarter price forecast is $3.07.

Demand for the fuel used by power plants and in home heating peaks in January and February, though last winter’s mildest weather since 2000 has helped keep inventory levels at seasonal records.

The movement of drilling rigs to the Eagle Ford shale in Texas from Haynesville in Louisiana will slow U.S. natural-gas output growth, David Greely, head of energy research at Goldman Sachs in New York, said in a Sept. 24 research report.

The additional capacity in Pennsylvania will cut pipeline costs, Richard Hunter, vice president of investor relations with Carrizo Oil & Gas Inc. in Houston, said in an Aug. 28 interview. Charges in Pennsylvania, where the company has wells, rose as high as $1.40 per thousand cubic feet recently, about double the rate before it started to run up in mid-2012, Hunter said.

“Starting in November of this year to December, that price is going to fall dramatically on new pipeline capacity,” to 50 or 75 cents per thousand cubic feet, he said.

To contact the reporter on this story: Naureen S. Malik in New York at Nmalik28@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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Companies Mentioned

  • SE
    (Spectra Energy Corp)
    • $40.92 USD
    • -1.25
    • -3.05%
  • KMP
    (Kinder Morgan Energy Partners LP)
    • $81.02 USD
    • -1.15
    • -1.42%
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