U.S. natural gas is poised to extend its biggest annual decline since 2004 as new pipelines from the Rocky Mountains deepen an unprecedented glut of the fuel.
National spot prices at the Henry Hub, the delivery point for New York Mercantile Exchange futures, fell 1.72 cents below those at Opal Hub, Wyoming, the benchmark price for the Rockies, for the first time in a year on Nov. 22. They have averaged 43 cents more than Opal’s so far this year and were as much as $7.52 higher in September 2008.
About 3.8 billion cubic feet a day of gas, equivalent to 6.1 percent of national output, will be able to be pumped next year from states such as Wyoming, home to the nation’s second-largest reserves, to California and Illinois, the U.S.’s second-and fifth-largest consumers, as new pipelines open. U.S. futures have tumbled 26 percent in 2010 as stockpiles climbed to an all-time high for the second consecutive year.
“Historically, Rockies gas prices were phenomenally low because they couldn’t get the gas to the customers, and now it’s moving out to the markets and arriving at a time of high gas inventories,” said James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas. “So it just exacerbates the national price weakness.”
Two new connections from the Rockies will come on line next year. The 302-mile (486-kilometer) Bison Pipeline, owned by TransCanada Corp., will have a capacity of 477 million cubic feet a day from the Powder River Basin in south Montana and northeast Wyoming to the Midwest. It will start service in mid-January. The 680-mile Ruby Pipeline, owned by El Paso Corp., will be able to send 1.5 billion cubic feet a day to the Pacific West, starting in June.
The supplies will add to those already moving via the 1,679-mile Rockies Express Pipeline, partly owned by Houston-based Kinder Morgan Energy Partners. The link started in November 2009 and can pump as much as 1.8 billion cubic feet a day of gas to the Midwest.
“You have a supply base in the Rockies but not much demand there, and the more you open up these pipelines the more gas you take from that region into higher-demand markets,” said Cameron Horwitz, an analyst at Canaccord Genuity in Houston. “The price spreads are narrowing in anticipation of the opening of new pipelines.”
Spot prices at Henry Hub in Erath, Louisiana, rose 7.4 cents, or 1.9 percent, to $4.09 per million British thermal units, according to the Intercontinental Exchange. Opal Hub gas traded at $3.83 per million Btu, up 8.5 cents, or 2.3 percent.
Henry Hub prices will decline for a third straight year in 2011, averaging $4.33 per million Btu, down from this year’s estimated average of $4.37, according to the Energy Department in Washington. Futures for January delivery fell 7.6 cents, or 1.8 percent, to settle at $4.076 per million Btu on the Nymex.
Wyoming produced 2.27 trillion cubic feet of gas in 2008, the latest year Energy Department data for both demand and production are available, almost 16 times its consumption of 142.7 billion cubic feet. The state has reserves of 36.7 trillion cubic feet, mostly so-called tight gas from shale formations with low permeability, according to the department. Texas has reserves of 85 trillion, the biggest in the U.S.
The links “raise the prices to producers in the Rockies but add to the national price weakness for gas,” said Williams. Rockies gas “is certainly increasing national stockpiles.”
Production will rise to a record 62.09 billion cubic feet a day this year, up 7 percent from 2008, according to the Energy Department. Wyoming produced an unprecedented 2.36 trillion cubic feet in 2009, up 4 percent.
Stockpiles of gas climbed to a record 3.843 trillion cubic feet in the week ended Nov. 12, according to the department. Gas in U.S. storage totaled 3.561 trillion cubic feet for the week ended Dec. 10, 9.9 percent above the five-year average and 1 percent below last year’s level.
The Ruby pipeline will help boost gas production in Wyoming, Utah, and Colorado by 750 million cubic feet a day by 2015, according to Bentek Energy LLC, an Evergreen, Colorado-based energy market-research company. The three states currently produce 7 billion cubic feet a day.
“By the time Ruby gets in, Opal will get a little bit stronger, and Henry Hub prices will be lower, so there will be general basis tightening from both affects,” said Jack Weixel, director of client services at Evergreen, Colorado-based Bentek.
The Ruby line, which starts from Opal Hub and ends at Malin, Oregon, will connect gas from the Rockies to PG&E Corp., California’s biggest utility owner, through the existing Oregon-California interstate pipelines.
California used 2.45 trillion cubic feet of gas in 2008, the latest year government data were available, according to the Energy Department. That’s about 11 percent of total U.S. gas consumption, the second highest after Texas. The state produced 296.5 billion cubic feet of gas in the same year.