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Border Wars: Changing Flows Between Texas and Louisiana

April 29, 2015 | By Charles Nevle

A few weeks ago in an earlier PointLogic Energy Get the Point article titled “Follow the Bouncing Ball: Inflows, Outflows and Supply Demand Dynamics by Region,” we discussed how growing production in the Northeast will soon overwhelm regional demand and will push out to the South and West displacing gas flows from other regions. In this article, we will focus on the Gulf Coast, specifically Texas and Louisiana, and how supply, demand, and flow dynamics are changing in this region and the implications of these changes in an environment of increasing demand from LNG exports.

Historically Texas has pushed a lot of gas to Louisiana. According to PointLogic’s flow analysis average flows from Texas to Louisiana averaged 7.0 Bcf/d in 2014.

Texas to Louisiana Throughput

Louisiana acts somewhat as a conduit for gas moving North and East to high demand markets which traditionally had relatively little production of their own.  Exports from PointLogic’s Gulf Coast region which includes Louisiana and Mississippi averaged 12.2 Bcf/d in 2014.

Gulf Coast Region Outflows

So, while Texas sends a lot of gas to Louisiana and while a lot of that gas then makes it on to other regions, it is clear from the charts above that the volume of this pathway is on a downward trend. Less gas is making its way from Louisiana to Texas and less gas is making its way from Louisiana on to other markets.

The gas moving from Texas to Louisiana can be divided into two regions, pipelines along the coast, and those further North. The decline in movements between the states is even more pronounced among the coastal pipelines as new pipelines targeted at Haynesville production such as MEP and Gulf Crossing provided a more efficient and less expensive route for growing regional production to makes its way to market at the expense of pipelines like NGPL, Transco and Trunkline.

Coastal Texas to Louisiana Throughput

Certainly growing Northeast production is the major contributor to this changing dynamic, but other culprits are also to blame. Although Texas production has been growing considerably due to the Eagle Ford and Permian, this growth is somewhat offset by declines in the North and East Texas from plays such as Cotton Valley, Boiser, Haynesville and Barnett.

Texas Production

Once you combine Texas and Louisiana production with offshore Gulf of Mexico production, it becomes apparent that the gains in Texas merely offset other regional production losses and keep overall regional production relatively flat.

Texas to Louisiana Production

Meanwhile, demand in Texas and Louisiana is on the rise driven by gains in power gen and industrial load growth. Total demand for Texas and Louisiana has risen by 1.7 Bcf/d since 2010.

Texas and Louisiana Natural Gas Consumption

Furthermore, exports to Mexico from Texas are on the rise. PointLogic’s Pipeline Projects Database is tracking 6 projects with a combined capacity of 3.0 Bcf/d coming online through 2017 in addition to two projects which went into service in 2014.

Cumulative Texas to Mexico Capacity Additions

Texas Exports to Mexico

As a result of these changing market conditions pricing relationships have of course changed as well.

Annual Average Basis Spreads

The chart above depicts three basis spreads between 2008-2014.

  • TCO – HSC: Can be thought of as the incentive to move gas from Texas Coastal region to the Northeast.
  • CG ML – HSC: Proxy for the incentive to move gas from Texas coastal region to the Louisiana coastal region.
  • TCO – CG ML: Proxy for the incentive to move gas from Louisiana coastal region to the Northeast.

Despite growing Texas production, the incentive to move gas East to Louisiana is declining as the market sends the signal that the Eastern markets don’t need as much Texas gas and as the demand picture discussed earlier indicates, more gas is needed in Texas to serve local demand and exports to Mexico.

Prospects Going Forward

So far the market dynamics have been supply side driven with shale gas growth in the Northeast and Texas dominating. In the not too distant future we expect that this picture will change significantly, with demand growth dominating the fundamental story for natural gas. LNG exports out of the US will likely begin as early as next year and ramp up quickly with most of the activity focused in a narrow region near the Louisiana and Texas border as well as further south along the Texas coast. In addition, exports to Mexico are also expected to rise materially making use of new pipelines being built on both sides of the border to serve growing demand in Mexico.

Already Texas is sending less gas to Louisiana due to growing demand (including future LNG demand) within the state. Louisiana will have to satisfy its own LNG export demand while relying on less and less Texas gas. This may present infrastructure challenges and will also impact regional pricing even more than the change in pricing we have seen over the past few years.

For instance, consider Transco’s Gulf Market Expansion Project. This proposed 1.4 bcf/d project is set to move gas from St 65 or 85 through South Louisiana to delivery points along the South Texas mainline. Think about the basis pricing that would need to be in effect in South Texas to incentivize gas to move past the enormous LNG demand that will be at the Texas/Louisiana border and serve export terminals along the Texas coast as well as Mexican export demand.

While changes in Texas and Louisiana flow patterns and pricing relationships have been extremely variable and dramatic over the past several years, PointLogic does not anticipate an end to this pattern, rather we expect that pricing and corresponding flow changes to remain quite volatile as this gas “border war” continues into the future.

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