Updated on May 13, 2020
This article has been updated to reflect information released since the article was initially published on May 5, 2020. Since the outage began, Appalachian prompt-month basis prices have continued to deteriorate, dropping from 10c-12c to around 20c below levels seen before the outage. With uncertainty surrounding the duration of the outage, we have updated our initial outlook on the impact of reduced flows on the Texas Eastern Pipeline. Read below our original article for a full update and outlook for a repair timeline.
Appalachia gas basis has slipped lower. Texas Eastern (TETCO) pipeline reduced southbound capacity starting with May 5 nominations after an explosion damaged the line near Owingsville, Kentucky. The outage has unknown duration, but outbound capacity from the Appalachia basin is reduced.
Appalachian gas basis prices took a hit on Tuesday as southern flows on TETCO were disrupted. Both TETCO M2 and Dominion South (Dom S.), which usually trade within pennies of each other, plunged about 12-14c for the prompt month and 10-11c for the balance of Summer 20.
Why is this important?
Because the Appalachia basin relies on TETCO, among other outbound pipelines, to dispose of extra gas, the outage on TETCO is most acutely bearish for the TETCO M2 basis market and those nearby markets that share a footprint with M2.
These Appalachia and Northeast markets are negatively affected by the TETCO outage because of the access to demand that TETCO provides.
The most directly affected market would be TETCO M2, which has a footprint along the intersection of the Pennsylvania, Ohio, and West Virginia borders. But the market impact in the region will likely extend to nearby points. The Dominion South basis market shares supply and pipeline infrastructure with TETCO M2, and both should see downward pressure. Points inside Pennsylvania may also suffer, bur probably by a lesser amount. Transco’s Leidy and Tennessee’s Zone 4, along with TETCO M3 could have more incentive to move extra gas into storage.
However, downstream markets, along TETCO as it makes its way to Louisiana, should have some bullish price support. These markets will now have less supply.
The TETCO M1 market is the most immediately affected, but few AEGIS clients have exposure to this somewhat illiquid basis price point.
As gas moves south, connections with interstate and intrastate pipelines makes the northern Louisiana area behave more like a “pool” where supply and demand are shared. Therefore, in our view, this TETCO outage’s downstream effect is likely to bolster Henry Hub market and “Haynesville” area prices.
The duration and recovery of the outage is the main variable to watch. If the outage extends into summer (and maybe fall), the Gulf Coast will have less supply during the months where power-generation demand for gas is rising.
This could add to a growing problem with supply. The Gulf Coast is facing a year-over-year shortage of natural gas because of reduced output – shut-ins and lack of new development – from the oil plays such as the Permian basin.
Pipeline Flows on TETCO
This isn’t the first time TETCO has seen its aging pipe come offline in the past 18 months. Last August, a gas explosion in Moreland, Kentucky, had a sudden impact on natural gas prices across the eastern half of the country. This outage had an effect on southbound pipeline flows for nearly a full month, as seen on the chart to the right. The pipe also had an unplanned outage in early 2019 that effected flows and caused price damage to Appalachia producers. This is also visible in the chart, with volumes hitting zero of that time period in 1Q2019.
Texas Eastern Pipeline Route
The Texas Eastern Transmission pipeline (TETCO) connects Texas and the Gulf Coast with high demand markets in the northeastern United States. There are 8,835 miles of pipeline that offer connections to the mid-Atlantic and Northeast Market.
Pipeline flows southwest from the producing regions of PA, WV, and Ohio into what are generally more premium Gulf Coast markets in the late spring through autumn months.
Updated - May 13, 2020
Impact on Flows
On Tuesday afternoon Texas Eastern provided an update:
“TE has three lines between its Owingsville and Wheelersburg compressor stations that make up its 30-inch pipeline system in this area. These lines are: Line 10, Line 15, and Line 25. The May 4th incident occurred on Line 10. As posted on May 4, 2020, TE has restricted capacity north to south thru its Owingsville compressor station to -0-. At this time, capacity will remain restricted to -0- through the station for until further notice.
Furthermore, the National Transportation Safety Board (NTSB) has assumed control of the incident site. The NTSB is investigating the incident and TE is supporting that investigation. Due to this, we are unable to provide updates on the investigation or the response.”
Based on our limited insight, we think this outage will last for weeks rather than months. The current outage seems to be mild in comparison to last year’s outage (see below for more discussion). This incident seems to be isolated to a single line pipe rather than multiple facilities as was the case in the August 1, 2019 pipeline explosion.
Therefore, the market risk is concentrated in June and July Appalachia basis rather than the autumn tenors.
The outage that occurred on August 1, 2019 was similar in effect, but not in the details. Damage from an explosion and damage to multiple facilities restricted southbound flows on TETCO to zero for nearly 30 days. After 30 days the pipeline flows increased by 0.7 Bcf/d, a partial restoration. Still total capacity was not fully restored for an additional 10 days. Curtailments lasted a total 40 days.
Outbound flows on TETCO were immediately reduced by 1.2 Bcf/d, however, flows on other outbound pipes were up by 0.7 Bcf/d. The remaining 0.5 Bcf/d may have been consumed locally or gone into storage.
Impact on Price
It still appears Appalachia production has mostly found other paths to market. Yet, local basis prices, TETCO M-2 and Dominion South, deteriorated after the incident occurred on May 5, 2020 and have continued to slide since. Dominion South and TETCO M-2 spot prices dropped by 19c and 20c, respectively during that period. While this drop may seem significant, had there not been spare takeaway capacity on interregional pipelines we could have seen a larger drop in prices. During the outage that occurred on August 1, 2019 prices slid by 30c during the 40 days of curtailments.
With no updates to the duration of the outage, the Appalachian basis discounts have room for further deterioration.