Born on the Bayou - LNG and Pipeline Reversals Turn Louisiana Gas Market Upside Down, Part 2

The supply-demand dynamic in Louisiana — and around the national benchmark pricing location Henry Hub — is rapidly changing, with LNG exports providing a new demand source in the state and both producers and midstreamers in high gear to push more supply there. These factors will disrupt existing flow patterns and pricing relationships in the region over the next two or three years, eventually turning the market entirely on its head. Today, we continue our series on the Louisiana market transformation with a detailed look at the infrastructure and gas flow trends already underway, starting with what’s going on in the eastern half of the state.

As we laid out in Part 1 of this series, the Louisiana market is in the midst of a significant transformation. What used to be primarily a supply market is becoming the epicenter of demand growth from LNG exports, which in turn are making the state the most desirable destination market for U.S. gas supply. Offshore gas production from the federal waters of the Gulf of Mexico has been rapidly receding. There is a slew of Marcellus/Utica takeaway projects in the works to reverse existing pipes or build new pipeline capacity in order to access the Gulf Coast market (see Fill Me Up Buttercup). These pipes are expected to bring a deluge of supply to the Louisiana market. And, after years of decline, Louisiana’s own Haynesville Shale is also in growth mode again.

These shifts will alter the Louisiana market balance and the traditional understanding of gas flows and pricing relationships in the region. That’s a big deal considering that Louisiana is the home state of the Henry Hub — the national benchmark pricing location for the U.S. spot gas market and the physical delivery point underlying the CME/NYMEX natural gas futures contract. Another location — the Perryville Hub — will also play an increasingly critical role as an axis point for distributing interstate supply targeting Gulf Coast demand.

To predict how the Louisiana market will evolve relative to its upstream and downstream markets, we first need to understand the infrastructure and historical gas flows in the state. As we noted in Part 1, Louisiana has the most dense, tangled network of natural gas pipes in the U.S., so in order to make sense out of these developments, we dissect the state into three sections: Northwest, which includes the Haynesville, Bossier and most Cotton Valley production; Northeast, which encompasses the Perryville Hub — a way station for gas flows coming from the west and Marcellus/Utica (see Turn the World Around for more on Perryville); and South, the region being transformed from a supply region (from offshore production) to a demand region (for LNG exports). Within these geographic sections we then aggregate pipeline flows moving in and out of these three regions into seven corridors — Upper and Lower East, Upper and Lower West, North, Offshore Gulf and Central (see corridor map in Part 1).

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