The Henry Hub is the best known natural gas trading location in the world. There is certainly no more liquid point in the industry. An average of almost 400,000 natural gas futures contracts trade there each day. The Henry price is used to compute location ‘basis’ at all other natural gas trading points in North America and thus is the reference price for tens-of-thousands of derivative instruments and other commercial contracts. In effect, the Henry Hub is the center of the natural gas trading universe. What if I were to tell you that Henry Hub is not a hub? It is not all located at some single spot you can drive by called Henry. And the gas flow through this so called hub is minimal. Could this be another LIBOR scandal where a benchmark is not what we thought? Or is all well and good at Henry, regardless of these revelations? Let’s find out why Henry is the Hub, why it developed the way it did, and how changes in gas flows from the big shale plays could impact Henry in the future.
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Here’s a heads up on this blog series. The Henry Hub in some way touches almost every aspect of the U.S. natural gas market. Its function is unique, it’s role frequently misunderstood, and changes are on the way to Henry Hub. The shale gas phenomenon combined with the potential for LNG exports could change its value relative to other parts of the market in North America. And that would be a big deal. Consequently this is not going to be a short blog series. It is going to take a number of postings to cover this topic. And for it all to make sense, we need to start at the beginning – where the Henry Hub came from in the first place.
The Time Before Henry
Trading of natural gas as a commodity is not something that goes back to the early days of the petroleum industry. Just over twenty-five years ago, most natural gas was sold by producers under long-term, life of lease contracts to pipelines at regulated prices. In 1985 that started to change with Federal Energy Regulatory Commission (FERC) Order 436 which created ‘open access’ on pipelines – in effect, allowing others besides the pipelines to ship gas. That really kicked off the spot market. Trade publications started to track prices at a variety of locations around the country, and for the first time there was some transparency in the market for natural gas prices. But it was still a very primitive market tangled up with legacy contracts and vestiges of price controls. Nevertheless, by the late 1980s natural gas started to be trade actively – mostly on a monthly basis during that magical period at the end of each month called bid week. The Natural Gas Decontrol Act finally wiped away the last vestiges of price controls in 1989.
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