New Marcellus Shale regional pipelines are beginning to pressure Henry Hub prices, sapping differentials in gas value as more of the area’s production escapes regional lockdown.

With more pipelines coming online in the next couple of years—two with a combined 4.75 billion cubic feet per day (Bcf/d) takeaway capacity—the Marcellus’ formidable production may no longer be so tightly confined.

Charles Robertson II, analyst with Cowen and Co., said that 2017 will likely mark the year in which new pipeline capacity outpaces supply growth in the Appalachian Basin, leading to stronger local pricing while weakening the Gulf Coast and Midwest.

Capacity will increase as pipeline construction continues through 2017-18.

“All the firm transport pricing that some companies have locked into for high prices over years will revert toward transport cost or lower as pipelines are overbuilt by end of 2018,” Robertson said.

The Northeast should see further pricing improvements as gas moves from local demand to new markets, Robertson said. However, other regions gas growth could be limited—particularly in the Barnett, Haynesville, Midcontinent and Rockies.

For now, prices in the Appalachia region are still low, trading for less than $1.50 per million British thermal units (MMBtu), the Energy Information Administration (EIA) said. However, since November they have crept somewhat closer to the Henry Hub price.

By Dec. 1, the price at Williams Cos. Inc.’s (NYSE: WMB) Transco System Leidy Hub averaged $0.89 below the Henry Hub. Five months earlier, the differential averaged $1.65 per MMBtu in July. The Transco pipeline underwent more than $2 billion in expansions from 2001-13, according to Williams.

Transco's Leidy Line project began service in December, and flows gas from the Marcellus to Transco's main pipeline extending from Texas to New York.

In recent months, several new pipeline infrastructure projects and expansions have started operations.

Spectra Energy Corp.’s (NYSE: SE) Texas Eastern Transmission Co. (Tetco) OPEN project added 550 MMcf/d of pipeline takeaway capacity out of Ohio and began full service in early November 2015.

EIA said other recent pipeline additions include Columbia Pipeline Group Inc.’s (NYSE: CPGX) East Side Expansion, a 310-MMcf/d project that moves natural gas produced in Pennsylvania to Middle Atlantic markets.

Tennessee Gas Pipeline's Broad Run Flexibility Project, a 590-MMcf/d project originating in West Virginia moves natural gas to the Gulf Coast states.

Circulation

Even more pipelines will add to the give and take between the Northeast and the South.

Robertson said multiple pipeline projects are expected to come online in 2017, relieving pipeline constraints in the Northeast.

Energy Transfer Partner LP’s (NYSE: ETP) Rover Pipeline project is designed to transport 3.25 Bcf/d of natural gas through about 710 miles of 24-inch, 30-inch, 36-inch and 42-inch pipeline.

The pipeline will include four mainline compressor stations, six supply lateral compressor stations and other ancillary facilities along its route. Rover will also construct a pipeline segment from the Midwest Hub in the Defiance County, Ohio area through Michigan to an interconnection with Vector Pipeline thereby enabling deliveries to additional points in Michigan and to the Union Gas Dawn Hub in Ontario, Canada.

The Rover pipeline’s first phase consists of 1.9 Bcf/d and will serve Midwest/Gulf Coast markets in the first quarter of 2017, Robertson said. In the second phase, the line will add 1.3 Bcf/d and will serve Michigan and Canadian markets beginning in the third quarter of 2017. Energy Transfer Partners said on its website that the pipeline is under review by the Federal Energy Regulatory Commission (FERC).

NEXUS Gas Transmission, another large-scale takeaway project scheduled to come online in late 2017, formally applied to FERC in November to build a 1.5 Bcf/d pipeline moving gas out of the Appalachian to markets in northern Ohio, southeastern Michigan and Dawn Hub in Ontario, Robertson said.

“The NEXUS and ET Rover, along with several other projects such as TETCO’s TEAL project, Ohio Valley Connector, and ANR’s East Project will enable pipeline takeaway capacity growth to eclipse supply growth in late 2017 and cause supply/demand market spreads to collapse,” he said.

While access to new pipeline capacity is generally a positive move for gas producers, they will also seek to maintain an optimal mix of in-basin exposure going forward, Robertson said.

Producers have also see demand increase from LNG projects and exports to Mexico.

“U.S. exports to Mexico have started to experience a lift as new pipelines have come online,” Robertson said.

December exports of U.S. natural gas hit a high, averaging 3.3 Bcf/d, up 1.5 Bcf/d since December 2014.

“The jump in exports is attributed to the Los Ramones II North pipeline which is taking South Texas gas deliveries from the NET Mexico pipeline,” he said.

January exports have been consistent with December 2015 levels, peaking at 3.5 Bcf/d earlier this month.

December exports of LNG to Mexico dropped to 560 MMcf/d, down 240 MMcf/d year-over-year.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.

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