We talk a lot here in the RBN blogosphere about the bearish market effects of the Shale Revolution, and frequently highlight the U.S. Northeast natural gas region — rapidly growing gas production from the Marcellus/Utica; oversupplied, trapped-gas conditions; and resulting regional price discounts. These dynamics are driving massive investments in pipeline reversals, expansions and new capacity to move the gas to market. Northeast producers are counting on that increase in takeaway capacity to relieve price pressure and balance the market. But all this gas moving out of the region needs a home. Fortunately, new demand is emerging, from exports (to Mexico and overseas LNG) and into the U.S. power sector. One of the big growth regions is the U.S. Southeast, where power utilities are investing heavily in building out their fleet of gas-fired generation plants and are banking on this new, unfettered access to cheap Marcellus/Utica gas supply. Today’s blog provides an update on power generation projects coming up in the southern half of the Eastern Seaboard, based on a recent report by our good friends at Natural Gas Intelligence — “Southern Exposure: Gas-Fired Generators Rising in the Southeast; But Will Northeast Gas Show Up?”
In five short years (between 2010 and 2015), production from the Marcellus/Utica grew by more than 16 Bcf/d, while demand in the Northeast grew by only 3 Bcf/d. As a result of the rapid production growth, the historically supply-short region became increasingly supply-saturated. Initially the production growth occurred at the expense of other supply coming into the region, i.e. by displacing gas flows from other U.S. regions (especially the Gulf Coast) and imports from Canada. But as production started exceeding demand in many months of the year — primarily in the warmer months when Northeast demand is lowest — the region has become a net supplier of natural gas to the rest of the U.S. and to Canada (see One Step Closer).
So now the Northeast region has the hallmarks of a veritable supply region — abundant (even excess) supply, discounted prices, lush price spreads to demand markets outside the region — with one major exception: it continues to lack adequate transportation capacity to bridge its supply with the fastest-growing demand markets, primarily in the Southeast/Gulf states. A lot of new takeaway capacity has been developed, starting with the less expensive, less regulatory-intensive projects –– namely modifications to existing pipeline capacity to allow shippers to backhaul or reverse forward-haul flows out of the Marcellus/Utica. As much takeaway capacity has been added to date, though, there is much more on the way. We group Northeast takeaway pipeline projects into pipeline “corridors” targeting five U.S. regions: the New England market, Canada, the Midwest via Ohio, and — for southbound takeaway capacity projects — the Gulf Coast states via Ohio and the southern half of the Eastern Seaboard via the Mid-Atlantic (for more see 50 Ways to Leave The Marcellus).
Of these targets, one of the most attractive markets for Marcellus/Utica gas is the Southeast (including the eastern Gulf Coast and the southern half of the Eastern Seaboard), where there has been a parallel and equally transformative renaissance happening on the demand side of the equation. A burgeoning supply area to the north, the prospect of access to low-priced gas, along with regulatory mandates that favor gas over coal, have incentivized a big shift in the generation stack (the order in which generators are dispatched based on fuel economics), and also helped to transform the power generation fleet in the region. Coal plants have been retired in droves and power utilities have made big investments in new gas-fired plants on torn-down coal plant sites or greenfield locations. Meanwhile, in contrast to the demand growth, gas production in the region has been flat to declining. And while gas prices have been low everywhere, the Southeast is now consistently one of the highest priced gas markets in the country, making it an attractive destination for Northeast producers. Of the 24 Northeast takeaway projects we’re tracking in our Midstream Infrastructure Database Interface (MIDI), 11 are targeting Southeast markets and of those, nine are earmarked for supplying brand new, highly efficient gas-fired power generation capacity being built –– not coincidentally –– along their routes.