Colder Weather, Part 4 - How Responsive Will Cove Point LNG Exports Be to Economics?

The latest weather forecasts for the second half of December have taken the edge off the U.S. natural gas market and reduced the chance of a true doomsday storage scenario. But U.S. gas storage inventories nonetheless remain at historically low levels, and long-term weather forecasts are notoriously fickle. So this winter could still see a resurgence in volatility before the market finds a balance. And while Henry Hub prices went on a wild ride earlier this month before settling back in below $4/MMBtu, for most of December thus far, Eastern gas prices have traded at levels that make LNG exports from there uneconomic. In today’s blog, we continue our review of the winter U.S. gas market with a closer look at how Cove Point Liquefaction (CPL) might respond to high prices.

In Part 1, we analyzed how low gas storage inventories heading into winter set the market up for more gas price upside — and more gas price volatility — than has been the case in recent years, particularly if winter weather turns unusually cold. And indeed, as cold weather materialized early in the 2018-19 heating season, the NYMEX Henry Hub gas price took off, then bounced up and down within the $4-5/MMBtu range through November before mild December weather forecasts brought the January contract down to about $3.75/MMBtu. In Part 2, we pointed out that the traditional governor for gas prices — switching between gas and coal in U.S. power generation — may not materialize in the same way it has in recent years, due to low coal inventories and some structural changes in the coal market. And in Part 3, we outlined the economics (and logistics) of turning off Sabine Pass LNG exports, coming to the conclusion that Henry prices would need to reach at least $5.50/MMBtu before we saw a material reduction in feedgas volumes.

Cove Point, though, is different. As we covered in Down by the Seaside, Dominion repurposed its Cove Point regasification terminal in Calvert County, MD (green diamond in Figure 1), into a one-train liquefaction plant. When the plant completed commissioning in April of this year, we laid out its feedgas dynamics in What’s Going On; the facility gets its feedgas supply from Dominion’s Cove Point Pipeline (purple line), which in turn sources supply from Transco (green line) and Columbia Gas (tan line). The two primary offtakers at Cove Point, Japan’s Sumitomo and India’s GAIL, have each signed long-term supply deals with a major Northeast producer — Sumitomo with Cabot Oil and Gas, while GAIL has signed with Antero Resources. And this fall, two major Northeast takeaway projects have been completed: Atlantic Sunrise, where Cabot has capacity on Transco to its interconnect with Cove Point Pipeline at Pleasant Valley, VA, and WB XPress, where Antero has capacity on Columbia Gas to its interconnect with Cove Point Pipeline in Loudoun County, VA (black dots).