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 Despite its location alongside the biggest natural gas deposit in
the country, the northeast region saw record price spikes on Monday
as an unprecedented surge in demand from power plants and homeowners
overwhelmed pipelines.
The rise in prices forced spot-market buyers in New York and New
England to pay up to 20 times more for their gas than amply supplied
hubs in Texas and Louisiana.
The volatility shows that nearly a decade into a drilling boom that
has flooded much of the country with gas, a lack of pipelines has
left some areas vulnerable to shortages this year and potentially
for years to come.
It is a weak spot in what has been a huge resurgence in U.S. natural
gas production over the past 10 years, and exposes how in some areas
pipelines have failed to keep up with the new supplies that have
come out of the ground.
"There's a reason why New England is the most volatile power and gas
market in the country," said Addison Armstrong, senior director of
market research at Tradition Energy in Stamford, Connecticut. "It
has been slow on the uptake and now we're behind the curve in terms
of getting additional capacity brought in there."
In New York on Monday, natural gas traded at an average of $55 per
million British thermal units on the Transco pipeline. Highs for the
day reached $90.
The average price broke highs first recorded in 2001, years before
the region began importing gas from the Marcellus. In Boston, gas on
the Algonquin pipeline swung up by $18 per mmBtu then down by $9 per
mmBtu as forecasts turned warmer on Tuesday.
MARCELLUS GIANT
The Marcellus shale, centered in Pennsylvania, has emerged as the
giant of the U.S. natural gas market. It currently produces 13
billion cubic feet of natural gas per day (bcfd), accounting for
about 18 percent of total U.S. supply, up from just 2 bcfd in 2010,
according to the Energy Information Administration.
Over the next three years, pipeline capacity from the Marcellus is
expected to grow to carry 8.7 bcf more gas per day, 4.3 bcf of which
will be directed to the Northeast, according to data from Jonathan
Gould, a senior oil and gas analyst at Genscape. But far less of
that will reach New England, Gould said.
Moreover, even that growth rate is not enough to keep up with the
robust production in the region, so flows from wells must be
tapered, Gould said.
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Despite years of supply bottlenecks, only one announced project is
targeting New England states. Spectra Energy's Algonquin Incremental
Market project will expand an existing system through Connecticut
and Massachusetts carrying 342 million cubic feet of gas per day.
The pipeline is not scheduled to be completed until November 2016,
however, and will not reach past Boston.
"There is a constraint getting all that gas out of the area," Gould
said. "In the Marcellus, you've got so many gas wells and it's such
a constrained system, that the pressure on the system keeps gas from
flowing how it would normally flow."
It is a tough break for the six New England states that have been
quick to change from coal to gas-powered electric plants. Natural
gas now supplies most of the electricity to the region. Between 2011
and 2017, New England will have cut its electricity generated from
coal by more than half, according to Reuters data.
Some companies are being forced to reroute gas originally meant for
New England to other regions to alleviate the supply built up in the
Marcellus, Armstrong said.
Building too much capacity too fast could flood the market and kill
demand on days that are milder than seen recently. Developing gas
supply becomes "lumpy," according to Gordon Pickering, an analyst at
Navigant Research in Houston, who said gas companies tend to develop
gas supplies before they develop pipelines.
"More supply means lower prices," said Pickering. "So pipeline
decisions require a long-term view of the market."
(Reporting by Julia Edwards; editing by Edward McAllister and Andre Grenon)
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