A slew of LNG export projects, largely in Texas and Louisiana, are under construction or in the planning phase but new Northeast pipeline capacity appears to fall short of supplying the demand centers. Luke Jackson looks at how the 'last mile' problem takes Northeast gas to the Midwest and other areas and paints a bullish story for Henry Hub prices.
Video Transcript
New US gas pipelines fall short of 'last mile' to LNG demand
By Luke Jackson, senior energy analyst
Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.
The Southeast natural gas market has a problem. Gas demand from LNG exports is expected to grow 10 Bcf/d the next five years, and in a high case, as much as 15 Bcf/d. To supply that growing demand, a massive buildout of pipeline capacity has been undertaken recently to move Northeast gas to the Southeast, with further capacity planned through 2019.
However, the actual new capacity from the Northeast that reaches these demand centers, specifically in Louisiana and East Texas, falls well short of the new demand.
Southeast will need gas from higher-cost dry gas basins to meet demand, which paints a bullish picture for Henry Hub prices
This means two things. One, the Southeast will need to draw supply from other, higher-cost dry gas basins to feed the rising demand, and, two,because supply will need to be drawn from higher-cost basins, it paints a bullish story for Henry Hub prices.
For the past three to four years, the Northeast has been constrained by pipeline capacity. Regional production could not grow unless additional pipeline capacity was built to support that growth. However, in a matter of months, close to 4 Bcf/d of incremental capacity will be added out of the Northeast, and by the end of 2019, 18 Bcf/d will be built.
With the Northeast pipeline problem slowly going away, the attention now turns to the downstream impact of this massive buildout.
A slew of LNG export projects are under construction or in the planning phase. Of these projects, Platts Analytics expects 10 Bcf/d of this capacity to materialize in our base case forecast, and more importantly, it materializes in two states: Louisiana and Texas.
An analysis of the 18 Bcf/d of total Northeast pipeline capacity being added out of the region reveals that just 4 Bcf/d reaches Louisiana and East Texas, with the balance landing in the Midwest, the TCO Pool in Kentucky and the Transco Zone 5 region near Virginia and North Carolina.
New pipelines from the Northeast don’t carry gas all the way to USGC demand centers, creating a ‘last mile’ problem
We’ve coined this the 'last mile' problem. New pipelines from the Northeast get gas halfway to growing demand centers in Louisiana and Texas, not all the way.
Why should the market care? The Marcellus and Utica are the two lowest cost gas producing basins in the country. If they cannot supply gas to these LNG export facilities, another producing region will need to pick up the slack.
Henry Hub gas prices need to rise to incentivize drilling in the Southeast, but current forward strip may not be high enough to prompt more production
With similar pipeline constraints moving associated gas volumes from the Permian and SCOOP/STACK to the Gulf Coast, it becomes clear Henry Hub gas prices will need to rise high enough to incentivize drilling in Southeast dry gas plays, such as the Haynesville or Fayetteville, that are closer in proximity to Louisiana and East Texas. With breakevens approaching $3-$4 in these plays, the current forward strip may not be high enough to incentivize a sufficient drilling response.
Until next time on the Snapshot — we’ll be keeping an eye on the markets.