(Pipes) Will Keep Us Together - Williams's Dalton Expansion and the Shifting Transco Gas Price Spread

For much of the past few years, natural gas at Northeast demand market hubs has been priced at deep discounts, particularly in the low-demand summer months, because of the flood of Marcellus Shale gas that couldn’t go anywhere else. But now, those markets could soon see some upward pressure as pipeline projects that will expand takeaway capacity from the region come online. One of those projects is Williams’s Transco Pipeline Dalton Expansion, which includes an expansion of Transco’s mainline as well as a new, “greenfield” lateral. The project has already commenced partial-path service to move as much as 448 MMcf/d south on the mainline from Transco’s Zone 6 in New Jersey to its Zone 4 segment in Mississippi. And just yesterday (Thursday, July 13), Transco submitted a request with the Federal Energy Regulatory Commission (FERC) to place the remaining portion — the new Dalton Lateral pipeline extension and related connections — into service less than three weeks from now (on August 1). Today, we provide an update on the project and potential market effects.

Before there were takeaway capacity issues out of the Northeast, the first market for Marcellus gas was, of course, the Northeast itself. Back in 2010, when major Marcellus gas production was just getting started, East Coast markets still garnered premium prices for gas, and shortage-inspired price spikes were still the norm during the winter when home and commercial heating peaked. Transportation capacity to move gas west-to-east was more readily available, and when more was needed, it was easier to expand that existing pipeline capacity eastward from the Marcellus. As a result, as much gas as transportation capacity would allow began to move east to the population centers, primarily New York and New Jersey. Eventually, however, as regional production grew and inundated the East Coast, prices in these areas — at Transco’s Zone 6-New York and non-New York trading hubs — collapsed. Not only did the winter price spikes shrink to mere shadows of their former peaks, but the average price of gas in the New York/New Jersey area dropped below the national index Henry Hub (in Louisiana) nearly all year round, after it had traded at a considerable premium for decades.

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However, the market dynamics just south of the New York/New Jersey area were entirely different. As Transco Z6 prices declined, prices along Transco’s Mid-Atlantic and Southeast zones (i.e., Transco Zone 5 through Virginia and South Carolina and Zone 4 through Georgia, Alabama and Mississippi) remained higher. That’s because those zones were buffered from the production growth happening just north of there, with no good way for that production to come south. The pipeline capacity along the Southeast and Mid-Atlantic regions was designed to move gas north into New York and New Jersey.  While supply that normally moved north along those zones was being pushed back by growing Marcellus gas, there was limited ability for Marcellus gas to physically move south into these markets. At the same time, the southern Atlantic states were leading the country’s conversion from coal- to gas-fired power generation by retiring coal plants, cranking up gas-fired generation plants to higher levels and also building a new fleet of state-of-the-art gas-fired plants (see Back Down South). With Marcellus gas mostly out of reach, much of this demand growth in the Southeast continued to rely on northbound gas flows coming from other producing regions, including offshore Gulf of Mexico, Haynesville, Texas and Oklahoma, some of which have been in decline in recent years. As a result of these dynamics, prices farther south in Transco’s Zone 5 and Zone 4 went from trading below Zone 6 all year to trading well above Zone 6 on all but peak winter days. The market turned upside-down from its traditional relationships. Figure 1 below illustrates that shift.

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