The New York Stock Exchange of natural gas – or the closest thing to it – is an industrial complex of pipes and compressors sprawled over a few acres of what was once farmland in southern Louisiana.
Owned by Sabine Pass, a subsidiary of Chevron Corporation, the Henry Hub interconnects with 13 major pipeline systems and can transport 1.8 billion cubic feet of natural gas per day (Bcf/d).
The complex sits on the outskirts of Erath, La. a few miles from the Gulf of Mexico. More recently, Erath provided the setting for the fictional murder of Dora Lange in the first episode of HBO’s gristly crime drama, True Detective.
“People out here, it is like they don’t even know the outside world exists,” said Matthew McConaughey, the star of the HBO series. “They might as well be living on the f___ing moon.”
While the good people of Erath may not be affected by what happens outside of Erath, virtually everyone in the United States in the United States is affected by the price of natural gas bought and sold at the Henry Hub in Erath.
For more than 20 years, the average price paid for one million British thermal units (MMBtu) of natural gas at the Henry Hub has been the price used for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX) and swaps traded on the Intercontinental Exchange.
The Henry Hub has historically been considered to be the most liquid trading point in the gas distribution system. And for good reason. The Gulf Coast region has been the nation’s primary natural gas production region. As a result, the Henry Hub price is supposed the best proxy available for the average market price of natural gas in the United States.
Until recently, it almost certainly was.
That has changed with the rise of the Marcellus Shale as a major gas producing region.
In 2010, the Marcellus Shale in Pennsylvania and West Virginia produced less than 2 Bcf/d. In 2013, the region was producing closer more than 15 BCF/d, or about 18% of all natural gas produced in the U.S., according to the U.S. Energy Information Administration.
“How important is the Henry Hub as a price proxy for the Eastern US? My thinking is that, before long, it won’t be very important at all,” Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas in New York, told Reuters in September.
Over the past month or so, spot prices at market hubs in Pennsylvania and West Virginia have dropped below $2 per MMBtu on several recent days when demand was low, while spot prices at Henry Hub have traded near $4 per MMBtu, according to the EIA. The so-called “negative basis” has become far more common over the past two years at market hubs in Pennsylvania due to a shale-induced supply glut in the region.
At the same time that production in the Marcellus Shale has surged, production in Louisiana has declined, especially offshore gas production. Texas production has been flat. Meanwhile, demand is rising and likely to keep rising as a clutch of LNG export terminals come online.
The rise of a new producing region combined with production declines in traditional areas of production is shifting historical flow patterns. It is only a matter of time before the market follows.