After back-to-back mild winters, the natural gas industry is facing its first real test since major changes related to shale gas development and the associated pipeline infrastructure additions have been put into place.
What are the Impacts?
Declining Temperatures = Record-Breaking Natural Gas Demand
On January 1, total U.S. natural gas demand was the highest on record, exceeding even peak demand during the Polar Vortex — by more than 7 billion cubic feet per day (Bcfd). While a significant amount of this increase has occurred in the Gulf — Liquid Natural Gas (LNG) exports up more than 3 Bcfd and Mexican exports up more than 2 Bcfd — there has also been a significant shift to natural gas in the power generation market (up nearly 2 Bcfd). Meeting this incremental power generation load will be one critical test over the coming days.
When it Comes to Supply, Well Freeze-Offs Pose a Big Risk
U.S. gas production capacity is up by nearly 9 Bcfd versus Polar Vortex levels, but well freeze-offs remain an ongoing concern. Gas production during the first few days of January has been roughly 5 Bcfd below average during December. While still implying a net 4 Bcfd increase relative to the Polar Vortex, recovery from well freeze-offs and exposure of the Marcellus/Utica region to such issues is another test over the coming days.
Storage Levels Are Dipping Low
Fortunately, the winter began with relatively high levels of underground gas storage, but those levels are also dropping precipitously now. Not much underground storage capacity has been added in the US since 2014, and as a result, current working gas levels are now below the five-year average and similar to levels observed during the Polar Vortex. Underground storage fill is similar in all regions across the continent except in the West, which while not forecasted to experience similar cold weather, continues to suffer from reductions in capacity at Aliso Canyon.
East Coast Pipeline Networks Will Experience Increasing Strain
Possibly the single largest change since the Polar Vortex is that a vast amount of new pipeline capacity has been placed into service since the last cold snap. However, most of this capacity is designed to move gas from the Marcellus/Utica to Midwest and Gulf Coast markets, in part to meet the sizeable increase in gas demand noted above. While some expansions move gas to Eastern markets (i.e., Algonquin Incremental Market, Connecticut Expansion, Sabal Trail, and the Dalton expansion), much of the new capacity does not reach all the way to market areas. Numerous pockets, including New England, Eastern New York, New Jersey, Eastern Pennsylvania, and the Carolinas are likely to be stressed. We refer to this area as a “congestion area” in which gas prices could be extremely high due to an extraordinarily tight supply/demand balance. During the Polar Vortex, gas prices rose precipitously within congestion areas, and we expect the same during the coming week.
Power Markets Relying Upon Unsure Oil Supplies
Early indications show power markets are already relying more heavily on fuel oil to generate enough electricity to satisfy consumer needs. However, an extended cold weather period will require refill of oil tanks. And, a sufficiently extended cold period could result in concerns about annual emission limits being reached or exceeded at some power plants. Further, wind and snow from winter storm Grayson could complicate oil refill due to poor road conditions and frozen waterways. Refill of LNG tanks at Everett LNG, one of the nation’s largest LNG import facilities, is also critical — and tankers appear to be queued up. Sustained cold weather is a concern, and the area’s gas utilities are monitoring their last line of defense, the LNG peak shaving reserve, closely. The absence of Massachusetts’ Pilgrim nuclear plant — which was recently removed from service — will cause further problems as gas and oil plants may need to make up for lost capacity.
LNG Supply Diverted Back to Storm Affected Regions
Interestingly, LNG exports appear to be responding to price signals by diverting gas from liquefaction activities to market needs. Even the Dominion export facility, which is currently undergoing final testing, has actually been net delivering supply to the market. As noted above, careful monitoring of LNG supplies is extremely important, especially refilling LNG tanks. Everett LNG appears to be queued up for refill based on shipping reports from the various marine web sites.
What's the Bottom Line?
Much debate has occurred regarding additional expansion of infrastructure and the associated alternatives to demand growth (e.g., gas electrification options, demand-side management, incremental peaking storage, and imported LNG) with resistance coming from many parties. In many respects, the recent back-to-back warm winters have lulled various segments of the market into a false sense of supply security. Recent and projected weather presents the first opportunity to assess the existing infrastructure. With its continuous monitoring of markets and unique weather scenario analysis, ICF is prepared to provide post-mortem analytics on market response and able to assess strengths and weaknesses that the weather exposes. Follow the The Spark or subscribe to the ICF Energy Digest for additional thoughts on the market response.