The End of the Displacement – Are Net Natural Gas Inflows into the U.S. Northeast History?

The U.S. Northeast natural gas market thus far has been able to offset local production growth primarily by pushing out supply from other regions.  But recent trends in pipeline flows suggest that for the first time, net flows into the Northeast will fall to zero this summer, marking the end of displacement. Meanwhile, regional natural gas production could be as much as 4 Bcf/d higher this summer than last. The result could put this summer’s prices in a precarious position further challenging producers suffering in an oversupplied market. . Today’s blog looks at recent trends in Northeast flows and implications for prices this summer.

    

The Northeast traditionally has sourced gas via pipelines from three adjoining regions: Southeast/Gulf Coast, Midwest and Canada. Back in 2009, before Marcellus production emerged as a supply source, there was almost no local production in the Northeast and inbound flows from these regions served nearly 80% of Northeast demand (see Déjà Vu All Over Again). As Marcellus production grew, pipelines took on backhauls, with Northeast receipts displacing flows from traditional sources of supply in Texas, Oklahoma and Louisiana (see Upside-Down: Natural Gas Pipeline Backhauls)  The pipelines bringing this gas to the Northeast either began to run empty or, when possible in the case of bidirectional pipelines, began flowing some supply in the other direction. In fact, since new pipeline capacity can take years to build, the only way Marcellus gas production could have expanded as fast as it has and remain economically viable, was by displacing existing inflows. This local demand buffer has provided some breathing space for midstream players to develop pipeline projects to facilitate outbound exports from the Northeast. However, local Marcellus/Utica production has been increasingly outstripping demand  before enough of those projects can come online to transport surplus supplies to other market centers (see Top Drivers to Watch in the Northeast Gas Market). 

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Figure 1 below illustrates the balance between growing supply and falling inbound flows in the Northeast. Using pipeline flow data from our friends at Genscape, the blue line on the chart shows historical gas flows into the Appalachia region (defined by Genscape as West Virginia, Ohio, Pennsylvania, New York and New Jersey). The red line in the chart shows growing supply from Marcellus/Utica production, which climbed about 14 Bcf/d between 2009 and 2014.The inbound flow data is measured from the major pipelines traditionally bringing gas from the Midwest, Southeast and Canada into Appalachia. The data shows that gas flows into Appalachia have dropped dramatically from close to 8 Bcf/d back in 2009, to less than 1 Bcf/d in 2014.

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