A TEXAS-SIZE DISCONNECT REVERBERATES ACROSS WESTERN GAS AND POWER MARKETS
In the past three years the value of natural gas at the Texas Gulf Coast has declined compared with nearby Henry Hub in Louisiana, due to growth in East Texas production, loss of Texas Gulf Coast industrial demand, and displacement of Permian gas eastward into Texas as growing Rockies gas supply pushes Mid-Continent gas into the Permian Basin. These developments have increased Katy region gas supply available for export eastward toward Henry Hub. The basis widening dramatically increased after Hurricanes Katrina and Rita shut down production east of Texas-and reverberated throughout western North America causing other Texas, western, and even Midwestern gas prices to reflect a greater discount to Henry Hub. Consequently, the spread between western and eastern power prices has widened, particularly in power markets where gas-fired generation is on the margin and, therefore, setting power prices. Going forward, CERA believes these fundamentals will drive the formation of Texas Gulf Coast-Henry Hub basis differentials:
- Gulf of Mexico supply recovery. Restoration of Gulf of Mexico and southern Louisiana onshore production will reduce the demand pull on replacement gas from Texas.
- Shifting storage and demand trends. Seasonal cycles for generation demand and storage withdrawals in Texas will continue, causing Katy basis to widen in the winter and tighten in the summer.
- Increasing export potential. The export potential is expected to increase in every regional Texas market over the next few years, increasing gas-on-gas competition and basis volatility until new pipeline export capacity is added.
- LNG and pipeline expansion. The LNG volumes ultimately delivered to import terminals on the Texas Gulf Coast are a key long-term driver of basis. In addition, basis will be sensitive to the amount of additional pipeline capacity built from the Katy area to south Louisiana, including that specifically built to move LNG imports eastward.
