Pipeline Transportation and Basis Spur Unprecedented Domestic Competition

As natural gas shale plays have expanded, the nation’s pipeline infrastructure has grown to accommodate the need to move gas out of new plays.  These pipeline expansions have made natural gas much more portable, which has changed pipeline basis relationships.  Traditional flow patterns have changed, and there is now competition within the U.S. that never existed before. Rockies producers can compete with Louisiana producers for markets in the East. Rockies producers also are competing for western markets, which were previously served by Canadian imports. This competition has brought prices up in the West, while triggering a drop in prices in the East. Meanwhile, the Midwest has seen a modest price increase; many say this is because that section of the country is now competing with markets to the east.

Historically, natural gas prices in the eastern half of the nation have been significantly higher than prices in the western half of the nation, and this has been for good reason. In the eastern half of the nation, particularly the Northeast, there is a heavy concentration of demand. However, pipeline infrastructure was constrained as the majority of supplies were sourced from the Texas/Louisiana region. This caused demand to often outpace supply-sourcing capabilities, leading to higher prices. In the western half of the nation, particularly in the Rockies, there was less demand and a heavy concentration of supplies, but the pipeline infrastructure to move supplies out of the Rockies was limited. Thus, supplies often outpaced demand, leading to depressed prices. Natural gas prices in the Midwest have, for the most part, been priced about in the middle, as there are supply-sourcing options from Louisiana, as well as Oklahoma, Texas, and Canada.

Improved infrastructure has resulted in a leveling of delivered natural gas prices from coast to coast. Presuming there are no constraints, the delivered price of natural gas typically only varies about $.40 per MMBtu from coast to coast. Historically, that price differential would have been at least double. 

However, pipeline expansions and increased portability have created a problem – a lack of throughput on numerous pipelines.  Some pipelines that extend from the Gulf of Mexico and traditionally served Midwest and Northeast markets are now dramatically underutilized, causing them to seek regulatory authority to hike their rates by as much as 60 percent.  More pipelines are expected to encounter this same problem of underutilization as long-term transport contracts expire and contract holders now have more pipeline transportation options available to choose from.

U.S. natural gas prices have equalized and pipeline basis is more representative of the true costs of transportation to move natural gas from one point to another, which has created a leveling out of the delivered price from coast to coast.  However, it also has prompted an increase in pipeline rate increase requests because of underutilization.  Valerie Wood, president of Energy Solutions, Inc., suggests, “end users need to keep a close eye on pipeline basis costs over the next five years.  Even if an end user isn’t directly contracting for capacity with a pipeline, its supplier is.  And increases in pipeline costs will be passed through accordingly.”

Natural Gas Price Outlook provides you with the tools needed to implement a cost-effective natural gas strategy for 2012 and beyond.  This 59-page, comprehensive analysis evaluates numerous price drivers and is a must-read for those who want answers to what the future holds for natural gas prices.  To learn more and secure your copy, visit http://www.naturalgasoutlook.com.

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About Energy Solutions, Inc.
Formed in 1996, Energy Solutions, Inc. is independently owned. With more than 50 years of experience in the natural gas industry, our team focuses on natural gas prices and in helping businesses improve their internal processes for the purchase of natural gas.