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End of the World as We Know It – Historical Natural Gas Market Relationships to be Obliterated

Since the world is scheduled to end tomorrow – at least according to the Mayans, it seems appropriate that we examine another looming catastrophe: the obliteration of existing North America natural gas market relationships and flow patterns, coming in 2016.   The good news about the end of this natural gas world is that not only do we know it is coming, we can make a pretty good guess about how and when it will happen, and thus prepare for it.  Today we’ll examine the market developments that will result in such dire consequences.

It is coming our way like a freight train.  North America pipeline flows are about to reverse.  The Northeast will become a net supply region, flipping the flows on north-to-south and west-to-east pipelines to move the opposite direction resulting in what could be some of the biggest changes in the natural gas industry since Ronald Reagan was president and the gas market was decontrolled.  And that means upheavals for prices, storage, basis differentials, and oh yes – what’s going to happen to all those pipelines?  Crazy talk?  We don’t think so. 

The Marcellus (and Utica) Change Everything

We introduced the possibility of natural gas flow reversals six months ago in The Marcellus Changes Everything.  The punch line was in Part IV of that series where we talked about surplus Northeast production and where it might be headed.  Since those blogs, Marcellus production is up by an astronomical 20% (1.6 Bcf/d growth from June 2012 to December 2012), and the picture is becoming clearer. 

Graph#1 below provides some of that clarity.  This is U.S. Natural Gas Production (total pipeline quality gas or residue gas, lower 48) from January 1, 2011 until today.  These are Bentek numbers from their Cell Model that assesses daily supply and demand in ten different regions (Cells) across North America based on pipeline flow data.  The red line is Marcellus production on the right scale, up from 3.9 Bcf/d on Jan. 1, 2011 to about 9.8 Bcf/d today.  As recently as 2009, total Northeast production (legacy Appalachian production plus Marcellus) was only 2.3 Bcf/d.  The green line is production from all other regions or the U.S., down from 58 Bcf/d in about this time last year to 54.8 Bcf/d today. So the Marcellus has basically been floating the boat for the rest of the country for the past year.

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