Rising shale output disrupts US gas prices – FT.com

It was dubbed the “king of pipelines”: a $6.7bn, 1,700-mile tubular highway transporting US natural gas east from the Rocky mountains to the gentle hills of Ohio.

Less than five years after the Rockies Express pipeline opened for business, its owners are now adding a westbound service. The reason? “Prolific and unforeseen growth of gas production” in the US northeast, they explain in a regulatory filing.



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The new direction for the Rockies Express shows how pipeline companies are scrambling to keep up with breakthroughs in shale gas drilling. Unlike shale oil, which is booming in North Dakota and Texas, the strongest shale gas growth is in northeastern states.

In the Marcellus Shale of Pennsylvania and West Virginia, gas output has climbed 800 per cent to 16bn cubic feet per day from November 2009, the month Rockies Express opened. The adjacent Utica shale of Ohio has grown at the same rate to a more modest 1.5bn cu ft/d, according to the Energy Information Administration.



Even as new supplies bring calm to gas futures markets, conditions in the northeast are anything but. Spot gas at the Dominion South trading hub in Pennsylvania has plunged 60 per cent in the last six months, compared with a 13 per cent fall in benchmark prices.

Pipeline developers now propose to funnel the emerging glut of northeast shale gas elsewhere. If they succeed, drilling companies, consumers such as power plants and would-be exporters of liquefied natural gas (LNG) will feel the effects.

Traditionally, pipelines have carried gas from the energy-rich Gulf of Mexico coast to the populous, gas-short regions of the north. One is the Texas Eastern Transmission (Tetco) pipeline, which travels from its namesake state to the New York metropolitan area.

In November, Tetco owner Spectra Energy plans to start bringing Marcellus gas to new markets, including the Gulf coast, at volumes of 600m cu ft/d with a project called TEAM 2014. The Rockies Express east-to-west project, originating in the Utica shale, would move 1.2bn cu ft/d starting next year.

These imminent projects are the tip of the iceberg. The Williams companies’ “Atlantic Sunrise” project, proposed to open in 2017, would take 1.7bn cu ft per day of Marcellus gas as far south as Georgia and Alabama. Energy Transfer Partners, another company, seeks to build a 3.25bn cu ft/d pipeline named “Rover” from the Marcellus and Utica shales to the central US Midwest and Ontario, Canada.

Teri Viswanath, gas analyst at BNP Paribas, says: “As we speak, these major transportation paths are being redefined.”

Not all projects will be built, but pipeline engineers are thinking big. To illustrate the fast-changing landscape, Anne Swedberg, a senior analyst at Bentek Energy, drew a large red X across an old map of announced Northeast pipeline expansion projects as she spoke at a recent conference in New York. The capacity of the projects had more than doubled in the past two months to 32bn cu ft/d.

As of last week, spot gas at Dominion South was $1.5685 per million British thermal units, compared with $3.9028 at the Henry hub in Louisiana, according to IntercontinentalExchange.

Even as gas flows south, the price discount – known as “basis” in commodity markets – between the northeast and Henry hub will remain about $1, or roughly the pipeline tariffs, Morgan Stanley says in a note. This continuing weakness adds pressure on Marcellus gas markets and producers such as Cabot Oil & Gas, Eclipse Resources, EQT, Range Resources and Southwestern Energy, the bank says, and has cut share price targets for the companies.

As gas production surges in the northeast, trading volumes have ballooned as well. About 400m cu ft/d of physical gas was sold on the average day at Dominion South this year, up from 284m in 2009, according to ICE. By contrast, physical volumes sold at Henry averaged 233m this year, down from more than 800m in 2009.

via Rising shale output disrupts US gas prices – FT.com.