Pipeline Capacity Additions Slow, Drive Up Natural Gas Prices

Natural gas prices are much higher at certain trading points in the Northeast compared to the rest of the United States due to pipeline constraints and limited liquefied natural gas deliveries in the region, according to data from the US Energy Information Administration.

US natural gas pipeline capacity investment slowed in 2012 after several years of growth, the EIA said in a brief released this week. Limited capacity additions were concentrated in the northeast US, mainly to remove bottlenecks for the fast-growing Marcellus shale gas production.

Total pipeline capacity additions were 4.5 Bcf in 2012, the lowest level in 15 years. Overall, only 367 miles of new pipeline were added last year with two-thirds of that amount installed in the Northeast. The two largest projects added to the Northeast last year include the Appalachian Gateway and the Sunrise, both of which move natural gas from Marcellus production fields to northeastern markets, the EIA said.

The greater New York metropolitan area and New England markets still experience frequent constraints despite those materials gains in pipeline capacity and the boom in shale natural gas production, the EIA said.

Average wholesale prices of natural gas fell significantly throughout the US in 2012 compared to 2011, according to report released in January by the EIA. The average wholesale price for natural gas at Henry Hub in Erath, La., fell from an average $4.02 per million British thermal units (MMBtu) in 2011 to $2.77 per MMBtu in 2012 — the lowest average annual price at this key benchmark location since 1999. A mild 2011-12 winter, sustained high natural gas inventories and rising natural gas production in the Marcellus and Eagle Ford basins contributed to lower average spot natural gas prices at Henry Hub.

Meanwhile, extended outages at both units of Southern California Edison’s San Onofre Nuclear Generating Stations (SONGS) have created a disparity in wholesale power prices between the northern and southern portions of the state, according to the US EIA.

Since April 2012, power prices in Southern California have exceeded those in the north with the spread averaging $4.15/MWh, or 12 percent of Northern California.

Historically, wholesale power prices for Northern and Southern California have tracked closely with one another, an indication of minimal market differences between the two areas. Once SONGS was shut down, the relatively cheap nuclear generation produced at the facility had to be replaced with power from more expensive sources.