May 3 (Bloomberg) -- Natural gas prices in the U.S. Northeast are poised to reach five-year seasonal highs this summer because increasing demand from power plants may be too much for pipelines to handle.
Regional costs may average $5 to $5.50 per million British thermal units, with the potential to jump to $7 to $8, Chris Kostas, senior power and gas analyst for Energy Security Analysis Inc., a market research and advisory company in Andover, Massachusetts, said in a May 1 interview. Average prices for summer delivery at Algonquin City Gates, which includes Boston, were less than $5 from 2009 to 2012 after jumping to more than $10 in 2008.
Kinder Morgan Energy Partners LP, Spectra Energy Corp. and Williams Cos., which own the region’s main interstate pipelines, say their systems are running at or near capacity. New England electricity customers were on the verge of rolling blackouts last June and again in February amid equipment failures and limited gas supply during periods of high demand, according to Philip Moeller, a member of the Federal Energy Regulatory Commission.
“Boston is in the hot seat with their lack of offtake or access to other sources,” Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania, said in a phone interview yesterday. “We can certainly be paying the highest prices since the 2008 commodity bubble.”
Futures rose 1.6 cents to settle at $4.041 per million British thermal units today on the New York Mercantile Exchange. Prices yesterday fell 7 percent in the biggest one-day percentage decline in nine months.
Gas at the Algonquin City Gates surged to a premium to benchmark gas at the Henry Hub in Erath, Louisiana, of $30.82 per million British thermal units on Jan. 24, the widest spread since January 2004, according to Intercontinental Exchange data compiled by Bloomberg. That sent spot prices in the region to a nine-year high of $34.38 per million Btu. The premium averaged a record $6.11 this year through April.
The premium to the benchmark for gas at Transco Zone 6, with deliveries to New York City, also reached a nine-year high in January.
“Until we get infrastructure built, we will continue to have price spikes,” said Kyle Cooper, director of research with IAF Advisors in Houston. “On hot summer days in Boston you could have spot gas going to $8 or $9.”
The pipeline bottlenecks are being driven by the Northeast’s increasing reliance on gas to produce electricity amid record U.S. supplies and the shutdown of older units fueled by coal because of environmental regulations. The shift toward gas accelerated last year, when New York futures dropped to a decade low of $1.902 per million Btu in April.
Frigid weather helped boost Northeast gas premiums to benchmark prices, known as basis spreads, in January and a hot summer may raise costs again as utilities seek the fuel to power air conditioners.
“This basis blowout had been primarily considered a winter phenomenon, but in the summertime, this market is getting pretty tight,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in an April 30 interview. “It’s really occurring during periods of peak demand, where there is simply not enough delivery pipeline to meet regional demand.”
A jump in prices and premiums may be limited by power generators switching from gas to coal and a possible restart of Canadian imports in July, Kostas said.
Electricity produced from gas plants rose 51 percent to 554,000 megawatt-hours per day in 2012 from 2008 and will stay near that record in 2013, the Energy Information Administration said in its April 9 Short-Term Energy Outlook. Gas-fired plants will produce 535,000 megawatt-hours per day in 2013, accounting for 35.6 percent of total electric output in the region, compared with 37.1 percent last year.
Prices at the Henry Hub have dropped 59 percent since 2008 as drilling technologies such as hydraulic fracturing, or fracking, made it more economical to tap shale deposits, including the Marcellus in Pennsylvania, Ohio and West Virginia. Pennsylvania gas production climbed 69 percent in 2012 from a year earlier to average 6.1 billion cubic feet a day, the EIA said in a March 21 report, citing data from the Pennsylvania Department of Environmental Protection.
“The supply situation has changed dramatically in a very short amount of time,” especially for the Northeast market that had been on the end of long-haul pipelines from the Gulf Coast and Western Canada, Moeller said in an April 24 phone interview from Washington.
While New England customers benefited from the recent drop in prices, “they became more reliant on gas, potentially to the point where it endangers reliability,” he said.
Gas inventories in the consuming East totaled 704 billion cubic feet in the week ended April 26, the lowest level for the time of the year since 2008, the EIA’s weekly storage report yesterday showed.
Power plants accounted for 90 percent of the growth in demand on Williams’s Transco pipeline system over the past three to five years, Frank Ferrazi, a Houston-based general manager and vice president for Transco, said in a March 21 interview. New York City prices on the coldest days have surged to $30 per million Btu from recent winter highs of $8 to $10, he said. “It’s because of the lack of available transport capacity.”
Gas plants accounted for 43 percent of New England’s power-generating capacity in 2012, up from 18 percent in 1990, Marcia Blomberg, a spokeswoman for the grid operator in Holyoke, Massachusetts, said in an e-mail yesterday.
New pipeline capacity that has come online over the past few years has been driven by the supply side, connecting the wellhead to regional pipelines, with no major projects increasing deliveries to consumers in New York and New England, Viswanath said.
Spot on-peak wholesale electricity in New York City averaged $75.13 a megawatt-hour from January through April while Boston prices averaged $78.50, a five-year seasonal high for both hubs, according to data from the regional grid operators compiled by Bloomberg.
ISO New England Inc., which manages the six-state grid from Connecticut to Maine, expects there to be sufficient supplies in the region to meet projected peak demand of 26,690 megawatts when temperatures reach 90 degrees Fahrenheit (32 Celsius), according to its summer outlook released April 29.
Unplanned generation outages, including those from fuel limitations during seasonal pipeline maintenance, or extreme heat “could create operational challenges this summer,” the New England grid operator said April 29. Shipments of liquefied natural gas to the region have dropped in the past year with the slide in gas prices as suppliers routed deliveries to premium markets in Asia and Europe, according to ISO New England.
The New York Independent System Operator Inc., which manages the state’s grid, hasn’t yet released its summer forecast.
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