Tuesday, June 2, 2009

Basis Fault Line and Pipelines

In its recent Haynesville Shale presentation, EnCana made a very interesting point about the pipeline boom underway around the Haynesville Play. I've discussed many of these projects, including the Tiger Pipeline, Gulf South Extension, LaCrosse, etc. What they generally have in common is that they originate at the Carthage, TX pipeline junction and move east.

What is interesting about these Haynesville projects and a few more to the south and north is that they cross what is referred to as the Basis Fault Line (BFL) with approximately 15 Bcf/day of new capacity. The BFL is an imaginary north-south line, pretty much along the Mississippi River, that separates the eastern and western gas markets and is a determinant in pricing.

Henry Hub in south Louisiana (on the east side of the BFL) is the pricing point for natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) and is also where spot trading prices are determined. Gas sold to the west of the BFL generally is sold at a discount to Henry Hub prices, while gas sold to the east of the BFL is sold at a premium to (or at) Henry Hub. Since most gas is used east of the Mississippi, there is less transportation involved with eastern gas.

On the map below, gas at Carthage is sold at 95% of Henry Hub prices, Katy, TX (Houston) is 95% of Henry Hub and Perryville, LA is 99%.

Clearly, the motivation is to get your gas from west to east, which is what these pipeline projects do. It is important to note that the new capacity also will allow other east Texas gas, not just Haynesville gas, to flow east. How will this increase of supply east of the BFL impact prices? I don't know.

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