(South) Eastbound and Down: The Southeast—Emerging Demand Epicenter of US Gas Industry

With U.S. natural gas production continuing to hit all-time records, the big question for the gas market is demand. Where is all that gas going to go?  Well, we are pretty sure that most of the supply growth will be absorbed by the triad of new gas fired power generation, industrial demand and exports.   The funny thing is that most of the volumes associated with these demand sources are located in one region – the southeastern U.S., with a heavy concentration of demand in Louisiana, home of the Henry Hub.  This shift is turning what was a major supply area into an epicenter of natural gas demand, with the need for extensive new transportation paths into, rather than out of, the region.  Today, we explore the implications of this transformation.

Historically Louisiana has had many roles in the natural gas market. It has long been a supply state, with significant onshore and offshore production.  Cheap natural gas encouraged the development of major petrochemical and other industries along the Mississippi River corridor, across the Gulf Coast region and elsewhere.  And Louisiana has functioned as a conduit, funneling gas from Texas, New Mexico and other states to pipelines feeding the Southeast and Northeast. 

But a few decades back, all that market activity ground down to a crawl. Louisiana onshore and offshore production started a long, slow decline in the 1970s.  Regulatory and supply problems hit the market and prices started to increase (see “Golden Years: The Golden Age of U.S. Natural Gas”).  Many of those industrial facilities closed up shop and moved overseas.  Increasingly Louisiana’s gas market role became more focused on that of a conduit, and a major pricing point with the selection of the Henry Hub as the delivery point for the NYMEX futures contract.  In the mid 2000s there was a brief spurt of new production growth from the Haynesville in Northwest Louisiana, one of the highest profile early shale plays.  But Haynesville’s dry gas and expensive wells eventually fell victim to low gas prices, and those production volumes started to decline as well.

But then Louisiana started to undergo a natural gas renaissance. Rapidly growing demand in Louisiana and the rest of the Southeast have transformed the region into the favorite destination market for gas from the Northeast, the Midcontinent, Texas and possibly even the Rocky Mountains.  In Louisiana and across the Southeast, gas-fired power generation is growing to meet increasing demand and to fill in for retiring coal plants.  The petrochemical industry is coming back onshore, to take advantage of abundant US gas supplies (see They Long to Be Close to You—Moving Marcellus/Utica Natural Gas South and West).  Exports, both in the form of LNG and pipeline gas to Mexico will pull gas out of the state.  And much of this gas will be coming from the Northeast.  In fact, some of the big, specific demand-growth projects along the Gulf Coast (petrochemical plants and LNG exports) are making contractual commitments to use supply from other regions, specifically the Northeast.  Thus we can truly say that U.S. natural gas is making its way (South) Eastbound and Down.