How Natural Gas Pipelines Affect Prices

Edward Camp, II

ShaleNavigator Team Lead at Geospatial Corporation

Pipeline takeaway greatly affects natural gas pricing

It’s now evident that we have an abundant natural gas supply in the Marcellus and Utica Shale region. One would think the plentiful supply would result in a reduction of natural gas price – and it has – but understanding how pipeline infrastructure affects localized pricing may not be so obvious.

As of December 2014, the Marcellus Shale alone was producing an average 1.6 billion cubic feet of natural gas each and every day. If you combine the average daily output of the Marcellus and Utica and compare it to all other major shale plays in the U.S., the Marcellus/Utica is producing 40 percent (nearly half) of all the natural gas now produced in the country.

The problem is, without enough pipelines in place to move that gas to other regions, the northeast is drowning in natural gas supply. As a result, the huge oversupply continues to depress prices for gas in Pennsylvania, Ohio, and West Virginia – the primary production areas for natural gas.

This is good news for homeowners, business owners, and commercial real estate serviced by natural gas in the region, particularly with the recent cold snap we’ve been experiencing – but is a challenge to natural gas producers to remain economical.

However, just a few hundred miles away from the production area, in New York City, New Jersey, Boston and New England, natural gas prices are significantly higher. Until additional pipeline infrastructure becomes a reality, those major urbanized demand areas will pay a significantly higher price.

Why? Let’s take a closer look at pipeline infrastructure in the overall Marcellus and Utica region. Pipelines are the key to move produced gas from ‘upstream’ well locations to local and regional urban markets where there is great demand for the product.

The ability to quickly and safely deliver the product relates directly to what we are paying for natural gas that heats our homes, apartments, and building complexes.

Secondly, electricity is generated typically from natural gas or coal-fired power plants, hydro, or wind power. Between the years of 2000 and 2013, New England went from getting 15 percent of its energy from natural gas to 46 percent, with dozens of power plants being built. But, the pipelines to supply natural gas to those power plants? They weren’t multiplying like the power plants.

As a result, when everyone turns on their heat, the existing and few major pipelines connecting New England to the Marcellus Shale are maxed out. During the winter of 2013 through 2014, gas storage levels hit historic lows and caused the price of natural gas to spike in places like Boston— sometimes over $100 per thousand cubic feet (Mcf).

Compare that with the ‘spot price’ of gas sold in the northeast Marcellus—which hovers at $2 per Mcf !

In New England, power plant operators are left to bid on the little bit of gas that’s left over for them and the prices have now raised to the highest levels ever recorded.

Big pipelines in New England are on the drawing board, but they won’t be built until 2018 at the earliest — and that’s only if they don’t get swamped by local opposition. Natural gas pipelines will help New England and other parts of the U.S. who are not in production areas reach normalcy. And, with the winters we’ve been having in the Northeast, the sooner the better.