While it may seem like the U.S. is flooded with natural gas, there still isn't enough to supply all markets. As evidence, the Energy Information Administration reported last month that the U.S. is still a net importer of natural gas. In fact, since November 2010, more than 25% of New England's average daily demand was imported from foreign sources.
The issue is not production. Exxon Mobil (XOM), Chesapeake Energy (CHK), Linn Energy (LINE) and their competitors can produce all the natural gas needed by the market. The issue is transportation.
Constraints within the interstate pipeline systems prevent natural gas from reaching major markets, such as the Northeast. In New England's case, three separate interstate pipelines serve and terminate in the region. Yet, there is not enough natural gas during peak winter periods.
The three pipelines serving New England are the Tennessee Gas Pipeline, owned by El Paso Corp. (EP), the Algonquin Gas Transmission, owned by Spectra Energy (SE) and the Maritimes & Northeast Pipeline, also owned by Spectra Energy. The Tennessee Gas Pipeline is a 14,000-mile pipeline originating in Texas and Louisiana and terminating in metropolitan Boston. Before the pipeline delivers natural gas to Boston and its surrounding areas, it must first serve New York City and intermediate markets.
Spectra's Algonquin Gas Transmission is a 1,128-mile transmission line system connecting southern New England to Spectra's Texas Eastern Transmission system. Like the Tennessee Gas pipeline, Texas Eastern's system originates in Texas and Louisiana and terminates in New York.
The third pipeline terminating in New England is the Maritimes & Northeast Pipeline. This pipeline originates in gas fields off Canada's Sable Island and flow southward to New England. Maritimes & Northeast Pipeline also serves the Canadian Maritime markets.
While eastern New England has three major interstate pipeline systems terminating in the region, there isn't always enough natural gas to serve peak demands. The issue is pipeline capacity. Pipelines have a practical limit as to the amount of natural gas they can handle. When they reach that limit, no additional natural gas can be delivered.
To assure firm delivery, either pipeline owners have to expand pipeline capacity or communities like New England have to import liquefied natural gas from foreign sources. In New England's case, importing LNG was their least cost solution.
New England went all in on LNG receiving and regasification terminals. They built four terminals and they are actively using two local terminals to balance supplies. The most active LNG terminal is the Everett Marine Terminal, located near Boston. Everett Marine is owned by France-based GDF Suez SA, and it has been operating longer than any other LNG import terminal in the U.S. It's received approximately half of all LNG imported into the U.S.
Another terminal actively serving New England is Canaport LNG. Canaport is located in Saint John, New Brunswick, Canada and is connected to the Maritimes & Northeast Pipeline through an intermediate pipeline. It is jointly owned by Spain-based Repsol YPF SA and Canada-based Irving Oil.
For much of the 2010-2011 winter season, EIA reports the Everett and Canaport LNG facilities delivered 1 billion to 1.5 billion cubic feet per day of natural gas into New England's local distribution systems.
It should not be surprising that natural gas in the Northeast trades at premium prices compared to the rest of the U.S. Pipeline constraints cause price disparities and importing costly LNG makes matters worse.
Since 2009, growing domestic gas production contributed to gas prices typically ranging between $2.50 and $5 per million British thermal units (MMBtu). Natural gas prices in Europe and Asia ranged much higher, reaching $10-$16/MMBtu. As a result, other LNG markets are typically served first, and the U.S. has become more of a residual market for LNG supplies not served under long-term contracts.
For the U.S. to achieve energy independence, more drilling isn't enough; there must be an investment in infrastructure. Additional or expanded pipelines would not only end price disparities, they would also create more demand by delivering more product to the market.
Constraints are not unique to the natural gas industry. They also are an issue in producing and delivering wholesale electric power and domestic oil.
As Investor's Business Daily reported last month, Bakken crude priced at Minnesota's Clearbrook terminal dropped 24% year-to-date to close at $72 per barrel. Canadian heavy crude produced from tar sands also fell 28% year-to-date. At the same time, retail energy prices soared.
What is the reason for low producer and high consumer prices? Constraints in pipeline capacity.
The chant "Drill, Baby, Drill" must be followed by another chant: "Build, Baby, Build." Without more pipeline capacity, drilling is for naught.
