FERC’s Office of Market Oversight and Investigation released its 2003 Natural Gas Market Assessment in late January. It included a discussion of the challenge of shifting supply and demand for maintaining sufficient delivery and transmission infrastructure.
The demand for natural gas supply shifts geographically as load centers grow or shrink in size and industrial and other uses of natural gas contract or increase. Similarly, the location of natural gas supply can shift over time. For instance, offshore Gulf of Mexico supply has increased recently while on and near shore Gulf of Mexico supply has decreased. These shifts in supply and demand can result in the need for expanded natural gas transmission capacity.
Places where delivery capacity is limited generally signal any tightness through prices. The difference between prices in different places is a useful indicator of the value of moving natural gas from one place to another. These differences are known as “basis”–a term that refers to the difference in prices between any two markets. In the U.S. natural gas industry, basis usually refers to geographical differences and typically reflects the value of gas transmission between those points.
Shifts in supply and demand have resulted in several regions that are now short of transmission capacity. These regions include:
“- The Rockies, which produces more natural gas than it uses. Pipeline capacity from the Rockies has not kept pace with productive capacity. Consequently, prices tend to be low and drilling incentives reduced. The resulting basis differential for natural gas from the Rockies has encouraged new pipeline capacity from the Rockies to California, including a recent doubling of Kern River with expected completion by the second or third quarter of 2003 (under a new owner). Northwest Pipeline is improving its ability to transport gas to the Northwest to compete with volumes flowing from Canada. At least four new and similar pipelines have been proposed in the Rockies to move natural gas eastward; however, none has yet filed at the Commission for certification.
“- The New York metropolitan area may need additional capacity to meet its demand. Analysis of capacity resale, or capacity release for pipelines serving the region, shows that transportation values have been high in recent winters, indicating some tightness in capacity. To continue to meet potential demand growth, at least one of the proposed (or similar) pipeline projects into the city would need to be built. However, annual average basis differentials from both Chicago and Niagara to New York City do not yet support the projects. Until the market can support making the binding capacity commitments necessary for financing a project, the viability and timing of any proposals remains uncertain.
“- Other areas in the Northeast may face capacity constraints as well. Tennessee Gas Pipeline Co. declared five emergency orders during the winter of 2001-02 in its Northeast market area. Tennessee received requests for gas flow in excess of available capacity, limiting the availability of interruptible service to New England and New York City. Analysis of Texas Eastern into New York, Pennsylvania, New Jersey, Delaware, Maryland and Virginia shows that capacity release prices were high during the colder-than-normal winter of 2000-2001. This winter, several pipelines in the Northeast, including Tennessee, Algonquin, Transco and Texas Eastern, have restricted services at times. Restrictions have included little or no authorized overrun service, reduced tolerance for imbalances and a variety of warnings to shippers to stay in balance or be subject to operational flow orders.
“- Areas in the Southeast, including parts of the Carolinas, Georgia and Florida, indicate some tightness in capacity. Analysis of capacity release data for Transco into the Carolinas and Georgia shows that the values for capacity release were high in the past two winters. In addition, Transco issued a number of constraint notices last winter limiting the availability of interruptible transportation service into an area stretching roughly from Alabama through Northern Virginia.
“- Florida, though a summer peaking market for natural gas deliveries, has experienced winter price spikes due to a lack of storage on Florida Gas Transmission combined with the demand for gas to meet heating load in other downstream markets.