As natural gas exports to Mexico continue to rise and as construction proceeds on Texas liquefaction/LNG export terminals, the day is approaching when Texas will flip from being a net producing region to being (with exports) a net demand region. Fortunately, supplies from elsewhere are readily available to meet that demand—sourced from the Marcellus/Utica and moving on new and reversed pipeline capacity to the Gulf Coast. A good portion of that gas must traverse “miles and miles of Texas” to meet the burgeoning export demand at the Agua Dulce hub near Corpus Christi, a location that is emerging as a key pricing point for the South Texas gas market. But a potential problem is looming: There may not be enough pipeline capacity available to meet that demand, with important implications for South Texas prices, flows and natural gas export volumes. The average annual basis at Agua Dulce could increase to as much as a dime ($0.10/MMbtu) above Henry Hub in 2020 from its historical level $0.02/MMbtu to $0.05/MMbtu below Henry. Today we discuss these and other highlights from the fourth and final part of RBN’s Drill Down series.

The aim of our Drill Down series has been to describe in detail something few would have thought possible 10 years ago: plans to pipe large volumes of natural gas from prolific shale production areas in the Northeast to Texas for pipeline export to Mexico and for liquefaction and export as LNG from new, multibillion-dollar facilities along the Gulf Coast. As we said in Part 1 of this four-part Drill Down series, Lower-48 U.S. gas production has grown at an unprecedented rate the past few years, with much of the growth since 2010 occurring in the Marcellus/Utica shale plays in Pennsylvania, Ohio and West Virginia, where, as of December 2016 (according to the Energy Information Administration, or EIA) gross gas production was averaging 22.2 Bcf/d. And the Marcellus/Utica is just getting started; RBN’s three forecast scenarios—Advance, Growth and Cutback—indicate that in 2022 the two Northeast basins will be producing between 29.4 Bcf/d and 33.2 Bcf/d, or 32% to 50% more than now. Expanding Marcellus/Utica gas production will need to be matched by new demand, and there are only three gas-demand growth markets likely to absorb that several billion cubic feet a day of incremental Marcellus/Utica production: 1) U.S. gas-fired power generation, 2) LNG exports, and 3) incremental pipeline exports to Mexico.

In Part 2, we examined 16 major Northeast-to-Gulf Coast takeaway projects (combined capacity, 14 Bcf/d) in detail. We also reviewed the key sources of growing export demand, starting with 13 Gulf Coast liquefaction trains with a combined capacity of about 58 million metric tons per annum, or MTPA (~8 Bcf/d; ~3.2 Bcf/d of it in Freeport and Corpus Christi, TX), that are either in early stages of operation along the Gulf Coast or under construction and scheduled to be online by the end of 2019. That analysis continued with a summary of Mexican gas demand growth.

Part 3 zeroed in on Texas—or, more specifically, on gas production (and gas production trends) in the state, and on the “miles and miles” of interstate and intrastate gas pipelines there that are being called up to help deliver increasing volumes of gas south along Texas’s Gulf Coast Industrial Corridor to LNG export terminals, to the suddenly significant Agua Dulce gas hub in Nueces County, TX (near Corpus Christi) and to the Mexican border. Because the capacity on most of the interstate pipelines along the Texas coast are “telescoped the wrong way”—that is, they were designed to add supplies as they moved north, but are now being called upon to move gas south­­––midstream companies are planning southbound capacity enhancements. But, even with new capacity that has been announced so far, there may not be enough southbound capacity to keep pace with rising export demand, and that shortfall would force a significant change in the relationship between gas prices at Agua Dulce, the Houston Ship Channel (which has been the most significant price index in the Texas market); and Henry Hub.