Northeast Natural Gas Market Continues To Battle To Grow

By: Allen Brooks

The Northeast quadrant of the country was the birthplace of the U.S. oil and gas industry. It now struggles with rapidly growing natural gas output, while neighboring New England residents suffer from the highest electricity prices nationwide. This dilemma was highlighted by two recent events – the release of the latest monthly Energy Information Administration (EIA) report for crude oil and natural gas production based on the department’s Form 914 survey of state energy agencies and producers, and the announcement of the delay in the Northeast Access pipeline expansion by the Algonquin Gas Transmission subsidiary of Enbridge Inc. (ENB-NYSE).

The growing gas supply in the Middle Atlantic region is represented by successful exploitation of the Marcellus and Utica shale formations underlying the states of Ohio, Pennsylvania, New York and West Virginia by E&P companies.

These formations were the location of early natural gas production, but the output declined over the years. The shale potential was acknowledged, but not exploited due to its drilling challenges. The successful marriage of horizontal drilling and massive hydraulic fracturing technologies, which revived natural gas output from the Barnett Basin in Texas in the early years of this century, changed the equation. As those technologies improved and demonstrated that they were capable of helping extract higher gas volumes than from conventional wells, Northeast drillers focused on these old producing states for their potential resources close to large energy consuming markets. The expectation became that developing these gas resources would yield higher wellhead prices due to avoiding substantial transmission charges. Unfortunately, that hasn’t happened.

The latest EIA monthly gas report for April 2017 showed that Ohio, Pennsylvania and West Virginia, the primary producers of Marcellus and Utica natural gas, experienced month-over-month output gains of 3.2%, 0.4%, and 0.6%, respectively. More impressive was the year-over-year production increases of 10.2%, 4.0%, and 11.0%, respectively. As shown in Exhibit 14 (next page), the history of U.S. natural gas production by state shows the significant growth in output experienced by Ohio, Pennsylvania, and West Virginia since 2012.

In recent times, natural gas prices in this region have been under pressure due to a lack of pipeline capacity to move the output to markets. The reversal of pipelines, allowing natural gas to flow west as well as east, has helped, but a substantial volume of Marcellus and Utica gas supply has been exported to Eastern Canada to meet its growing needs as Western Canadian gas supplies have been limited in growth. None of what has happened in this region has been what was envisioned when the drilling boom began a half-dozen years ago.

Increased natural gas consumption in the Northeast, particularly for gas-fired electricity generation, has happened, but most of the demand growth has been met by increased expensive liquefied natural gas (LNG). New England electricity consumers have not benefited from low U.S. natural gas prices, and especially not from the depressed wellhead prices experienced by Marcellus producers.

In 2016, according to ISO New England, the nonprofit corporation responsible for electricity pricing and supply in the region, almost 50% of electricity was powered by natural gas, followed by nuclear at 31%, renewables at 9.7%, hydroelectric at 7.1%, and coal’s 2.4% share. The most recent monthly fuel mix data was roughly similar to the annual data, but with natural gas down to 45% and renewables up to 11%. Within the renewables category, 7% of the total came from wood, refuse and landfill gas. Wind accounted for 3%, helped by the start-up of the Block Island offshore wind farm, while 1% came from solar resources. Coal units generated 0.8% of the region’s power, while oil-fired resources produced under 0.1%. The May ISO New England fuel mix report also showed the region receiving net imports of 1,328-gigawatt hours of electricity from neighboring regions, over 14% of total power consumed.

According to ISO New England, the region’s gas-fired electricity capacity has grown from 18% in 2000 to 45% now. By 2025, it expects gas-fired capacity will account for 56% of output given older nuclear and oil- and coal-fired power station retirements. While a number of gas pipeline projects are being considered, several major ones have recently been canceled or delayed, largely due to protests by local activists adopting the anti-fracturing mantra of environmentalists.

One major gas project canceled was Kinder Morgan’s (KMI-NYSE) Northeast Energy Direct, which failed to gain sufficient commitments from large customers needed to support the $3.3 billion for New York and Massachusetts pipelines. The project would have shipped 1.3 billion cubic feet per day (bcf/d) of natural gas.

The latest New England project to be suspended is Algonquin’s Northeast Access pipeline expansion. Enbridge, the parent company, announced on June 29th that it was suspending federal permitting for the $3.2 billion upgrade project that would have delivered an additional 1 bcf/d of gas to serve around 60% of the New England electricity capacity.

Both the Northeast Access and Northeast Energy Direct pipeline projects were targeted for being on stream for the winter of 2018-2019. Winter is a key time for natural gas supply due to cold temperatures forcing New England electricity providers to push out more power for home heating. To generate that increased power, since electricity utilities cannot enter long-term supply contracts, they are forced to rely on short-term supplies, principally LNG, or restarting old coal- or oil-fired power plants. The company managements behind the suspended pipeline projects employed estimates of the financial savings consumers would gain from the pipelines being in service to try to gain public support. According to Enbridge, “New England commercial and residential consumers during years with normal to severe winters” would save an estimated $1 billion to $2.5 billion in their power bills if the Algonquin expansion had been in place.

A recent article asked whether New Englanders are really that opposed to new pipelines. A survey conducted by the Consumer Energy Alliance (CEA) was cited as evidence that the opposition was not that strong. The survey was conducted of 500 voters in Connecticut, Massachusetts, New Hampshire and New York. More than 90% of respondents are positive regarding the importance of affordable and reliable energy and the necessity of having these supplies. However, only 58% approve of expanding or adding new pipelines. According to Brydon Ross, CEA’s vice president for state affairs in comments to Rigzone, “In reality, it’s a small but very influential set of opposition voices that are setting and determining the economic future and trajectory for an entire state and region.” He went on to say, “At the end of the day, the polls are confirming what we all intuitively know – we need this critical infrastructure and the public not only wants it maintained but expanded.” He believes this opposition can be overcome with increased education.

Mr. Ross commented on how the protest scene has changed and why increased communications are important. “The rise of the professional protester has really changed things across society. It is important for the industry and public officials to make sure there is readily available and fully transparent information about energy, energy products, and the important roles they play in our lives each and every day,” he said.

That’s good advice, but the view of the energy business is extremely distorted in the Northeast. For example, in Rhode Island, not only has there been strong opposition to the Algonquin expansion, but there has also been a pitched battle underway over a proposed 900-megawatt natural gas-fired power plant targeted to be built in Burrillville, in the northeast corner of the state, by Invenergy. Burrillville also is the site of an Algonquin pipeline compressor station that is scheduled for expansion. Residents who have lived alongside the compressor for decades suddenly complained about its noise. After more than a year of battling, the power plant’s owner last week announced its delay until at least June 1, 2020. The project had originally expected to be delivering power starting in 2019. At a power auction earlier this year, it received interest for only half the output, raising questions as to whether all the power will be needed as soon as 2019. It will be needed later, though.

Higher natural gas prices during the first half of this year have prompted increased drilling in the Marcellus and Utica formations. Natural gas producers have drilled 397 shale wells in the first half of 2017, more than twice the number drilled in last year’s period. There are about 20 more drilling rigs working now. The opening of new pipelines such as Rover, Mariner 2, Atlantic Sunrise and PennEast has improved takeaway capacity from the region, further incentivizing producers to drill. Their enthusiasm for the formation helped drive the recently announced acquisition of Rice Energy Inc. (RICE-NYSE) by EQT Corp. (EQT-NYSE) for $6.7 billion, a healthy premium. Hopefully, the Northeast gets its act together to expand gas pipeline capacity into the region soon before all the supply sources are locked up.

 

Source:

http://oilpro.com/post/31998/northeast-natural-gas-market-continues-to-battle-to-grow?utm_source=DailyNewsletter&utm_medium=email&utm_campaign=newsletter&utm_term=2017-07-19&utm_content=Article_4_txt