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Natural Gas Prices and Evolving Infrastructure

June 10th, 2011

OMAHA (Capstone Energy Services) – An early summer heat wave in the eastern half of the country pushed natural gas prices up to a 10 month high with the July contract closing at $4.847 on Wednesday. The 80 Bcf Storage injection reported this week did reverse the upward momentum, at least temporarily, but the hot weather forecasts continue to persist, which will limit the extent of any significant downward move. Daily spot prices have jumped up in areas of high demand, with the highest prices being recorded in areas where infrastructure limitations exist, primarily in the New York metro area and New England. Chicago and Appalachian gas have been trading at a $.20 premium to NYMEX while New York and New England have been at a $1.00-$2.00 premium.

Many projects are underway to alleviate some of the infrastructure problems in the Northeast and to provide facilities required to expand delivery of Marcellus shale gas to the area. These projects should help lower prices and reduce the daily price volatility by increasing deliverability. This infrastructure enhancement in the Northeast, however, is dramatically transforming the gas supply structure as the primary sources of supply shift away from Gulf Coast gas to locally produced Appalachian gas. Long haul pipelines such as Tennessee, Texas Gas and Columbia Gulf are experiencing dramatic declines in throughput, creating a financial strain. In addition, the proliferation of Northeast gas supplies has lead to a rapid increase in exports to Canada, which, in turn, has severely reduced throughput on the TransCanada Pipeline system that traditionally delivered Alberta supplies to eastern Canada and New England.

The throughput reductions on these long haul pipelines are forcing them to file with regulatory authorities for significant rate increases and rate restructuring. TransCanada has received a 37% interim increase in rates and has filed for permanent approval of a 50% increase. Tennessee Gas Pipeline and Columbia Gulf have made similar filings. In its rate filing, Tennessee requested a significant reduction in the commodity and fuel cost components to try to promote additional throughput volumes to Northeast markets. It also requested permission to restructure its rate design so that all fixed pipeline costs will be paid by firm capacity holders. This change, if approved by the Federal Energy Regulatory Commission, will offset some of the lost throughput revenue through a demand rate increase to firm capacity holders.

These are examples of transitional struggles taking place as shale production increases. Similar examples exist in Louisiana and Texas as onshore shale gas displaces offshore supplies. As these new projects are completed, a new market dynamic will emerge that will likely reduce some of the geographic price disparity that exists today as well as some of the price volatility.

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By Ed Freeman

Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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