Two new pipelines to be built over the next 12-18 months are likely to bring down natural gas prices on the U.S. market just when they were starting to rise more consistently. While this is good news for consumers, it is not so welcomed news for producers, who might have to start thinking about finding new markets.
The pipelines in question are Atlantic Sunrise, a project of Williams Partners, and Energy Transfer Partners’ Rover. The two got the greenlight from the Federal Energy Regulatory Commission last week and became cause for celebration for producers in the Utica and Marcellus shale plays, who have been forced by low prices and lack of governmental support to sell their gas at a solid discount to the national benchmark Henry Hub.
Of course, Energy Transfer Partners and Williams Partners will also take part in the celebrations, as would power utilities as they will be able to buy cheaper gas. Yet, the party may soon be over for the producers as the reality of abundant supply sets in.
Atlantic Sunrise will extend the Transco pipeline to the Mid-Atlantic and Southeastern U.S., adding 1.7 billion cubic feet to its daily capacity. The Rover pipeline is part of a project that will see gas flowing to the Midwest, the Northeast, the East Coast, and Canada. It will transport 3.25 billion cubic feet of shale gas daily.
This gas will be added to the output marketed by other pipeline operators and is bound to push down prices, as Bloomberg Gadfly’s Liam Denning notes in an analysis, just as any new supply of a commodity on any given market would push down the price of that commodity.
What’s more, in the short term, local gas prices could fall even more if the White House continues following the hard line against Mexico. According to analysts quoted by Bloomberg, if the conflict escalates into a trade war, gas prices may slump by 40 percent to $2 per million British thermal units. This, however, is a scenario where gas exports to Mexico are suspended. Such a scenario, the analysts admit, is unlikely but still a possibility.
On the other hand, regardless of prices, part of the increased supply will go towards new power generation plants, which will curb the downward pressure on prices. The natural gas-fired generation capacity of the U.S. is set for an 8-percent growth by next year, according to EIA data gathered from the power generation industry. This year newly added capacity should reach 11.2GW. 2018 will be even better, with 25.4 GW to be added to overall capacity.
Foreign markets are another option for offloading the gas—Asia and Europe in particular. A special focus is placed on Europe because of its liquidity, storage capacity, and, not least, the willingness of Europeans to increase the share of LNG in their energy mix and the money to do it. Besides, Europe will only be too happy to embrace more U.S. gas imports at the expense of Russia’s Gazprom.
With half of U.S. households relying on natural gas for heating, and with the growing adoption of gas as a power generation fuel, the downward risk for prices is relatively limited, assuming U.S.-Mexican relations don’t get worse than they are now. At the same time, the upward potential of foreign markets also needs to be carefully considered, and E&Ps should not waste any time in exploiting it. Gas is the bridge fuel and everyone wants it, but there are also major suppliers that U.S. exporters will have to contend with on international markets.