Natural Gas Oversupply and New Pipeline Capacity Promise Bonanza for Northeast Natural Gas Buyers
A new report from BENTEK Energy examines the consequences of rapidly changing natural gas market conditions in the Northeast resulting from continuing increases in domestic production, new pipeline infrastructure and shifts in the sources of natural gas imports. Just issued, Part 3 of BENTEK’s “Catch the Wave™” Market Alert series illustrates important Northeast market developments during Winter 2008-09 and describes how new drilling and completion technologies are changing the competitive landscape in the Northeast and across North America.
“It has been a long time since Northeast gas buyers have been faced with such a combination of attractive supply alternatives combined with highly complex market dynamics,” noted E. Russell (Rusty) Braziel, BENTEK managing director. “In just a few short weeks, the Rockies Express Pipeline will thrust Rockies producers into direct competition with suppliers from the Gulf and Midcontinent regions for Northeast market share. Production from those same regions continues to increase, even in the face of lower prices and falling rig counts. In the Gulf, production is growing so fast that it is threatening to exceed maximum outbound throughput capacity on all of the region’s major pipeline systems. Demand destruction and LNG imports remain wildcards. It is a lot of things to be hitting the market at the same time, but mostly good for natural gas buyers.”
U.S. gas production is expected to grow in 2009 despite the recession and drilling cut backs, as producers move drilling rigs to areas with much higher per well initial production rates, such as the Haynesville play located in northwest Louisiana and East Texas. This shift in capital deployment combined with the aggressive application of new drilling and completion technologies are offsetting the impact of a free-fall in the rig count, with the net result an expected 4% increase in production for 2009, according to the report.
“The application of new drilling technologies to unconventional resource plays in areas where the geology is well understood has resulted in extremely high well success rates and much larger reserves inventories,” said Braziel. “As a consequence, many of the traditional finding and development uncertainties in the E&P business are being replaced by risks generally associated with classical manufacturing economics, such as overcapacity, high inventories, and marginalized prices. This has important implications for the supply-demand balance over the long term.”
On the demand side, the BENTEK report sheds light on the apparent discrepancy between demand and pricing in the Northeast this winter. While the recession has resulted in some demand destruction, the impact has been muted by strong winter heating demand. Average Northeast demand is up about 4% this winter with peak demand soaring more than 35 Bcf/d (billion cubic feet per day) on January 16, 2009, compared to peaks of 28-32 Bcf/d during the previous four winters. In contrast, peak and average daily gas price premiums in the Northeast this winter have been significantly lower compared to last winter, with access to cheaper supplies due to pipeline expansions such Millennium-NE07 being the primary contributing factor. This development has important implications for the Summer of 2009 and beyond with the completion of Rockies Express and other pipeline projects.
“The other big factor is imports,” Braziel continued. “Imports from Canada are expected to continue decreasing as conventional production in the Western Canadian Sedimentary Basin declines. However, most of the decrease will take place at border crossing points in the Midwest and West, which will have a minimal effect on Northeast supply levels. Canadian imports averaged 10.7 Bcf/d in 2008, but are projected to decline slightly to average about 10.4 Bcf/d in 2009.”
With prices below $4.00/MMbtu (million British thermal units) and expected to trend lower, the report also casts doubt that the U.S. could end up being a major dumping ground for global LNG surpluses, at least in the short term. If LNG does show up, the most likely destinations are expected to be terminals on the Atlantic Seaboard and Atlantic Canada, not those on the Gulf Coast.
In addition to its “Catch the Wave™” Market Alert series, BENTEK offers the Northeast Observer™ to provide daily updates and a weekly summary of market developments and a comprehensive analysis of all market factors pertinent to the Northeast region. For more information about BENTEK’s “Catch the Wave™” Market Alert series or Northeast Observer™, go to www.bentekenergy.com or call BENTEK at 888-251-1264. Learn about these developments and more at BENTEK’s natural gas symposium in Houston, TX, June 2-4, 2009. For more information go to: www.bentekenergy.com/benposium.
