Natural gas pipeline expansion cutting into spread profits

By Moming Zhou

(Bloomberg) — A record expansion of U.S. natural- gas pipelines this year is cutting into profits from buying the fuel in one location and selling it in another as regional supply imbalances decline.

The network may grow 4,646 miles this year, the biggest gain since at least 1998, Energy Department figures show.

 The difference between gas at NGPL Mid-Continent hub, covering shipments to Chicago, and the benchmark Henry Hub in Louisiana averaged 14.2 cents per million British thermal units this year, the smallest spread since 2001, according to the Intercontinental Exchange and data compiled by Bloomberg.

Trading profits have already narrowed as the industry added about 8,315 miles of gas lines from 2008 to 2010. Some connect to local shale-gas formations, reducing the chances of shortfalls that can send regional prices soaring.

“With more pipelines, you are really breaking down barriers and building a national system where gas flows with very little impediment,” said Cameron Horwitz, an analyst in Houston at Canaccord Genuity. “Guys who were once profiting off the volatility in those spreads are migrating away.”

There were about 306,000 miles of gas pipelines in the lower 48 states in 2008, according to Energy Department estimates. Gas output from shale formations, so-called unconventional gas, increased to a record 3.11 trillion cubic feet in the U.S. in 2009, according to the department.

The additional supplies have helped send gas futures on the New York Mercantile Exchange down 27 percent to $4.374 per million Btu today from $6.009 on Jan. 6, 2010, the high for that year.

Expanding connections are sending unconventional gas to the Northeast and Midwest markets from shale formations in the Appalachians and the Rocky Mountains.

Williams Partners LP, a Tulsa, Oklahoma-based pipeline company, said last year that it’s adding lines to send Marcellus shale gas in Pennsylvania to New York and New Jersey. The Northeast Supply Link Project is designed to deliver 243 million cubic feet of natural gas a day by November 2013, according to Williams.

“We have Marcellus here in the Northeast, combined with further expansion of pipeline throughout the area, it’s going to put downward pressure on basis differentials,” said Stefan Revielle, an analyst at Credit Suisse Securities in New York.

The spread, or basis, between the Transco-Z6 hub, which delivers gas to the New York City region, and Henry Hub fell to 17.8 cents on June 14, the lowest level since Oct. 22, 2010. The difference, which averaged $1.20 in the past five years, surged as high as $15.87 on Dec. 14 as cold weather boosted heating demand.

“Additional pipelines in the Marcellus area are easing the bottleneck to the Northeast market,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas.

Empire Pipeline Inc., a subsidiary of Williamsville, New York-based National Fuel Gas Co., is constructing a 15-mile extension to move Marcellus gas to markets in the Northeast and Canada. The project is scheduled to be completed in November, according to the company.

“With numerous Marcellus-fueled expansion projects on the horizon for 2012 and beyond, we expect growth in” the pipeline and storage segment to continue “for the foreseeable future,” David Smith, chief executive officer of National Fuel Gas, said in a conference call last month.

Gas production in Pennsylvania rose to a record 273.9 billion cubic feet in 2009, the latest year Energy Department data were available.

Companies are also trying to send more gas from the Rocky Mountains to the Midwest and California.

TransCanada Corp. started operating the 303-mile Bison pipeline in January, shipping gas from Wyoming to Midwest markets. Bison, TransCanada’s first link to access gas production in the Rockies, has an initial capacity of 407 million cubic feet a day, expandable to 1 billion, according to the company.

The spread between gas at the Opal Hub in Wyoming, the benchmark for the Rockies, and the Chicago city gate averaged 37 cents this year, the lowest since at least 2001. It averaged $1.45 in the past five years.

The 1,679-mile Rockies Express Pipeline, partly owned by Houston-based Kinder Morgan Energy Partners, began moving gas to the Midwest in November 2009. The conduit can deliver as much as 1.8 billion cubic feet a day.

“The Bison pipeline and Rockies Express have brought more natural gas supplies into Chicago and the Midwest,” said Steve Piper, an analyst at Boulder, Colorado-based SNL Energy. “Expansion of shale natural gas from Marcellus” will further pressure the basis downward.

Another link, the 680-mile Ruby Pipeline, owned by El Paso Corp., will be able to send 1.5 billion cubic feet a day of gas west from the Rockies starting in July.

Energy Transfer Partners’ Tiger Pipeline, which carries gas from the Haynesville Shale in Louisiana and Bossier Sands in East Texas to markets across the country, was put in service December, 1, 2010.

The 175-mile interstate connection has the capacity of transporting 2 billion cubic feet of gas a day. An expansion of the pipeline is under way, which will bring the line’s total capacity to 2.4 billion, according to Vicki Anderson Granado, a company spokeswoman.

The U.S. has 2,552 trillion cubic feet of potential gas resources, including 827 trillion from shale, according to the Energy Department. At the forecast 2011 consumption of 67.06 billion cubic feet a day, the reserves can support more than 100 years of demand.

Marketed gas production will reach a record high of 64.61 billion cubic feet a day this year, the Energy Department said in a monthly report on June 7.

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