The last decade marked a reversal of fortunes for two major arteries moving North American natural gas, Rockies Express (REX) and Great Lakes pipeline, driven first by US shale development in the East and then associated gas production growth in the West and Canada. This reversal of fortune for REX and Great Lakes serves to remind us that industry dynamics can quickly shift, with implications for regional production and pricing relationships. As associated gas grows and greenfield Appalachian pipes open new markets to a rush of Northeast gas, it’s time to widen our horizon when it comes to the US gas market to understand what developments lie ahead. To address this, BTU is now including our forecasts of Waha and CIG in our Northeast Gas Outlook.
In 2017, the last phase of REX and the first phase of Rover went into service, increasing competition for Midwest demand markets between the Marcellus & Utica, Canadian, and Rockies volumes. That competition led to heightened focus within BTU Analytics’ Northeast Outlook service on that dynamic with analysis on the implications for Dominion South and other regional pricing points. The chart below highlights the on-going evolution in pricing across the four regions.
The growth in associated gas production in the Western US and Canada has led to a weakening of pricing at AECO, CIG, and Waha at the same time new infrastructure from Appalachia has improved Dominion South pricing. Now Dominion South is trading at a premium to CIG, Waha, and AECO for the first time since 2012. The result is that end users with access to multiple supply sources now have less incentive to buy Appalachian supply than in any time over the past 5 years.
The shift in pricing, with Appalachia moving to a relative premium and end-users shifting supply preferences, can be seen in flows in two major arteries into the Midwest. The chart below shows flows on REX from the Rockies and on Great Lakes pipeline that enters the US from Canada through Minnesota.
First let’s focus on what caused the decline in Great Lakes’ flows from 2008 to 2013. Canadian shippers have long faced competition with growing US supply. Great Lakes felt that pressure acutely declining from over 1.8 Bcf/d in 2008 to a low send out of just 0.2 Bcf/d in 2013 as Appalachian volumes displaced Canadian gas in the Northeast US. During that period, Great Lakes even flowed north into Canada.
Moving to REX, Rockies Express entered service in 2010 and flows started out near nameplate capacity of 1.8 Bcf/d at the Rockies border but began to trail off as production peaked due to declining investment in dry natural gas plays and additional pipelines were built to transport Rockies production. REX flows at the Rockies border declined on an annual basis through 2014, with new monthly lows hit in 2016 and 2017. At the same time, Appalachian growth spurred multiple reversal projects on REX, now allowing it to move over 2.5 Bcf/d west out of Appalachia.
Both pipelines though have seen a reversal of flows from their lowest points with send out steadily increasing as producers ramped up drilling in each region in the hunt for liquids while Permian associated gas production soared to displace gas out of Western markets (Subscribers see the May edition of the Upstream Outlook for a deep dive on West natural gas pipeline congestion and constraints). In 2018, both Great Lakes and REX have returned to levels not seen since 2010/2011.
With another tranche of Rover capacity set to begin service and NEXUS not far behind, the competition between gas sourced from the Rockies, Permian, and Canada will only intensify, reversing fortunes for other major pipelines. To help our clients further understand the interplay between regions and pricing, BTU Analytics’ Northeast Gas Outlook will now include forecasts for Waha and CIG. Request a sample today.