A glut of cheap natural gas trapped in the U.S. Northeast will be heading south by the end of the year, radically changing the price differences between the regions.

Pipeline expansions by Williams Cos., Kinder Morgan Inc. and Spectra Energy Corp. will carry shale gas from the Marcellus reservoir to southern states as early as the fourth quarter. That’ll narrow the premium for gas in the Southeast to as little as 30 cents per million British thermal units from more than a dollar versus the Northeast, Genscape Inc. and Tudor Pickering Holt & Co. said July 20.

New pipelines are closing the divide between the winners and losers of America’s shale revolution as long-awaited supplies from tight-rock formations move to southern states and other regions. Without a Marcellus of its own, the Southeast, including Florida, where demand is booming, has missed out on the cheap fuel that has come with increased output.

“These projects will definitely reduce the spread between the Northeast and other regions,” Tony Franjie, senior natural gas analyst for Genscape in Sugar Land, Texas, said July 20. “Everyone but those near the shale plays has kind of missed out on the boom. It’s just crazy what’s happened in the Northeast.”

Spot gas in Florida rose 2.8% on the Intercontinental Exchange to $2.94 per million British thermal units on Tuesday, while Marcellus supplies at the Leidy hub slumped to $1.2615.

Price Difference

The difference between the two has averaged $1.48 this year and will shrink to about 30 cents as pipelines come online over the next three years, Franjie said. Tudor Pickering analyst Jeff Schmidt similarly forecast between 20 to 30 cents.

Natural gas futures lost 0.1% to $2.879 on the New York Mercantile Exchange at 12:05 p.m. London time on Wednesday.

Gas output in the Marcellus has jumped more than 14-fold since January 2007, reaching a record 16.5 billion cubic ft a day in June, U.S. EIA data show. Some of that will be shipped overseas in the form of liquefied natural gas, with average daily exports from the U.S. reaching 9.6 billion cubic ft by 2025, according to IHS CERA.

An expansion of Williams’s 10,200-mi Transcontinental Gas Pipeline system on the East Coast may enter service in December. Other proposals totaling as much as 7.5 billion cubic ft a day of capacity are scheduled to come online in 2016 and 2017. One billion cubic feet of gas is enough to heat about 10,000 U.S. homes for a year.

Shrinking Discount

The new capacity will allow so much gas to leave the Marcellus that the discount for supplies at the Leidy hub will shrink by as much as 50 cents versus gas at the U.S. benchmark Henry Hub in Louisiana, said Charles Blanchard, a Bloomberg New Energy Finance analyst in New York. The spread was $1.62 on July 21.

Projects capable of carrying as much as 2.1 billion cubic ft a day, or about 17% of Southeast demand, are scheduled to begin service by the end of the year. Kinder Morgan’s Tennessee Gas Pipeline system will boost deliveries beginning in November. Spectra’s Ohio Pipeline Energy Network will start shipping to the South and Midwest in the fourth quarter.

Some of that shale gas will flow to Florida, where power plant demand for the fuel hit a record for April, up 13% from a year earlier, based on the latest EIA data. The state is home to six of the 20 fastest-growing U.S. metropolitan areas. Gas flows to the Southeast have more than doubled since 2007, according to LCI Energy Insight in El Paso, Texas.

Disney Benefits

The Reedy Creek Improvement District, which supplies power to Walt Disney World in central Florida, is already benefiting because of Northeast shale gas. The district, which has a gas-fired cogeneration plant and operates its own electric grid, is connected to Kinder Morgan’s Florida Gas Transmission pipeline system.

Reedy Creek customers “have seen lower electric energy supply costs as a result of shale gas supply,” Ann Blakeslee, the district’s deputy administrator, said by e-mail July 17. Southern Co., which has 4.3 million customers in Alabama, Georgia, Florida and Mississippi, also buys gas from suppliers “active in the Marcellus region,” spokesman Jack Bonnikson said by e-mail.

The shipments underscore how quickly the Marcellus shale formation -- spread across Pennsylvania, West Virginia and Ohio -- has dominated the gas market. It has become America’s biggest producer in less than a decade and is now spreading its wealth across the country.

The pipelines coming online over the next three years will mark an “opening of the floodgates” to the U.S. Southeast, Schmidt said. “It’s a little bit of the best of both worlds. The producers should see some relief and consumers should see some relief in the heaviest demand season.”

Source: www.bloomberg.com

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