For nearly a quarter-century, traders around the world have looked to a spot in Louisiana for the best price of U.S. natural gas. Now they're looking east.
The Henry Hub in southern Louisiana, which connects to more than a dozen on- and offshore pipelines from Texas and the Gulf of Mexico, has been surpassed as the most active place for trading physical U.S. natural gas by hubs in shale-rich Pennsylvania.
"How important is the Henry Hub as a price proxy for the Eastern U.S.? My thinking is that, before long, it won’t be very important at all," said Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas in New York.
Only about 240,000 million British thermal units (mmBtu) per day of natural gas have traded in the day-ahead Henry Hub market this year, down 70 percent from an average of more than 825,000 five years ago, according to IntercontinentalExchange data.
The Dominion South hub, a key supply point in the Marcellus shale in southwest Pennsylvania, has averaged nearly 400,000 mmBtu per day so far this year, up sharply from about 290,000 in 2009, the ICE data show.
The switch reflects the boom in shale gas production, as well as a growing recognition that pricing all U.S. gas at a single hub no longer makes sense. The industry is struggling to build new pipelines and infrastructure quickly enough to even out growing price discrepancies in regions like the Northeast.
A decade ago, the Gulf of Mexico pumped about 20 percent of all U.S. natural gas, much of which flowed through the Henry Hub. Now it produces just 4 percent of the nation's total.
Five years ago, the Marcellus produced barely 2 billion cubic feet of gas per day. Now it pumps 16 Bcfd, a fifth of America's gas. It is at the heart of the U.S. shale gas revolution, where the combination of hydraulic fracturing, or fracking, and horizontal drilling technologies have brought massive volumes of gas inexpensively out of once-ignored fields.
The Henry Hub's long-time role as the primary point for pricing contracts for future and prompt gas delivery is beginning to shift.
"Physically, we are buying a lot more supply indexed to the Marcellus pricing points than we did historically," said Kate Trischitta, director of trading at ConEdison Energy, a unit of energy holding company Consolidated Edison Inc.
MORE PIPES COULD NARROW SPREAD
The shale revolution has also pushed prices for gas from the Northeast much lower than gas from the Gulf Coast. Next-day gas at Dominion South went from 21 cents per mmBtu over Henry Hub during the summer of 2009 to 30 cents under in the summer of 2013.
This summer, Dominion South, one of the most-watched price points in the East, was at a discount of $1.50, five times the year-ago discount.
Next-day Dominion South, which hit a 13-year low of $1.72 per mmBtu last week, averaged $2.66 this summer, the lowest since at least 2001, according to Reuters data. Henry Hub spot averaged $4.15.
Some analysts think the spread will narrow as more pipelines are built. Energy companies expect to build pipelines capable of carrying 16 bcf per day out of Northeast fields by 2017, which could double the amount of gas flowing out of the region.
Others question whether prices will converge soon.
"The cost is steep to build new pipelines," Citigroup analyst Anthony Yuen said in a report. "Not all of the pipeline takeaway capacity proposed would be fully subscribed; some may be delayed or canceled."
The Northeast price spreads are likely to "remain challenged" into 2015, Domenic Dell'Osso, CFO at Chesapeake Energy Corp, a major U.S. gas producer, said during the company's August earnings call.
Analysts agree that Henry Hub will remain a benchmark for U.S. gas futures, at least in the U.S. Gulf and West and in international markets.
And with the global acceptance of NYMEX prices, it is likely to keep setting rates for U.S. liquefied natural gas (LNG) when the country starts exporting the fuel in a few years.
"Henry could still be king ... but (gas pricing) is going to be based on location, more than anything else," said Aaron Calder, analyst at Gelber & Associates in Houston.
(In paragraph 10, makes clear Consolidated Edison is a holding company)
(Editing by David Gregorio)