We will start hearing this week from gas companies how they performed during the fiscal quarter that ended Sept. 30. Expect to hear a lot about dismal prices in the Marcellus shale.
The energy industry looks to daily trading at the Henry Hub in Louisiana to set the national price of natural gas, but producers often get a different price where they sell into pipeline hubs, which they call a basis differential. In the Marcellus, that basis has stayed in the negative column way too long for some companies.
“There’s a big basis problem in the Northeast,” Range Resources CEO Jeff Ventura told the Tribune-Review this month.
In April, producers delivering gas to five Marcellus hubs generally found those daily “spot” prices at about $4 per million British thermal unit, within $1 or less of Henry Hub. Prices at four of those hubs spent much of the summer $2 below the benchmark and have recently dropped further.
Only the TCO Appalachia Pool Hub, which reflects the price of gas heading into the Columbia Gas Transmission pipeline southwest of Pittsburgh, has kept pace with Henry, the Energy Information Administration said last week.
Gas companies with connections to several pipelines can bounce around to find the best prices. Three months ago, executives predicted an average negative basis this summer close to $1. We’ll find out how far off they were in the next week or two.
They can blame, in part, their own success.
Companies keep putting up record production numbers, both for Pennsylvania — nearly 2 trillion cubic feet of gas in the first half of this year, a 38 percent increase over the year before — and across the shale play, the most productive in the country.
Pipelines don’t have enough room to move that bountiful supply to where it’s needed. Ventura predicted it will take another two years for the pipes to catch up.
“The supply can’t get to where the demand is,” said Tom Murphy, co-director of Penn State University’s Marcellus Center of Outreach and Research.
Power companies in New England, still frost-bitten by last year’s polar vortex and worried about firing up the grid without the coal plants that are increasingly shutting down, are looking for electricity from hydropower plants in Quebec to get through the winter, Murphy noted.
A six-hour’s drive away in northeast Pennsylvania, a 27 percent increase in production this year created such a glut of gas that prices dipped below $1 there recently. The pipelines needed to get that gas past New York City might never be built.
The difference cuts into the bottom line and further unsettles executives planning for next year under the cloud of a potential severance tax promoted by Democrat Tom Wolf, who leads Gov. Tom Corbett in polls ahead of the Nov. 4 election.
Wolf acknowledged the price difference during a recent meeting with Trib reporters and editors, but still thinks an added tax is necessary to raise between $600 million and $1 billion a year.
“Price convergence will happen. It has in most other industries,” he said.