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In the early 1970s, the U.S. imported significant volumes of natural gas against a backdrop of declining domestic gas production – a time when gas-fired power generation wasn’t much more than an interesting statistic, and coal was king. There was a ban of new natural gas hookups due to lack of supply, with the annual demand curve looking like a “U” rather than the “W” we are seeing now. The primary source of supply was the Gulf, both onshore and off, with many of the pipelines moving that supply from the southwest to the northeast. As the midstream pipes moved further away from the primary source in the Gulf, the pricing became more volatile, especially in the winter when demand was high.
Since January 2011, domestic natural gas production from major shale plays has increased from 28 Bcf/day to 85.4 Bcf/day in June of 2021 (EIA data). Appalachia, which was 3.5 Bcf/day and 19% of the total in Jan 2011, is now producing 34.3 Bcf/day (40.2%).
The major shift in regional supply provided the market with significant infrastructure changes across several greenfield projects, as well as dozens of expansions that increased capacity and reversed traditional flow directions. One pipeline, Transcontinental Gas Pipeline, or Transco, traditionally flowed gas along its right of way pathway from south Texas up to New York City. Transco has developed several projects that allow the traditional south-north flow pattern to reverse to a north-south pattern for most of the year to enable some of the excess Appalachian supply to reach expanding mid-Atlantic and Gulf coast markets.
Transco can also provide additional gas to New Jersey/New York, which used to be the “end of the line” via connections with cheaper Appalachian supply, and displace gas from south Texas. This serves to push the “end of the line” null point where north-south supplies meet and balance south-north production, bouncing between Virginia and North Carolina.
The impact of this pricing can be seen in the chart above, which shows the historical monthly Index pricing and the forward pricing for two separate Transco pricing points:
- The former end of the line in New Jersey/ New York (Transco Zone 6-Non-NY)
- The new end of the line, referenced by Transco Zone 5 price point in the Virginia/North Carolina area
Pricing can be seen trending lower overall for the Z6-NNY point vs. historic prices, which is tightly correlated to Z5 pricing indicating competition for the same molecules. Notably, in 2020, a Z5 premium came into play, with capacity heading south and reaching its limits as power demand in Transco Z5 and LNG export demand along the Gulf Coast markets grew.