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When Worlds Collide: Reviewing Dominion South and TCO App Basis

May 10, 2017 | By Callie Kolbe

Appalachian pricing hubs Dominion South Point and Columbia Gas (TCO) Appalachia are located in the heart of the Marcellus and Utica and serve as active trading hubs for Appalachian production. System production on Dominion Transmission Inc. and on TCO account for 20% of overall Northeast production, and their storage inventories also account for nearly half of the Energy Information Administration’s (EIA) East Region storage activity. 

In this week’s Get the Point, we analyze some of the relationships of storage and prices that have emerged between Dominion and TCO from last summer to this summer.

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Almost one year ago, we looked at the Dominion and TCO impact on storage in the Northeast in Get the Point: Shall We Dance? As of the week ending April  28, 2016, combined storage inventories at TCO and Dominion were 213 billion cubic feet (Bcf), or 43 Bcf above the prior 5-year average and 74 Bcf above 2015 levels.

The picture looks different today, as end-April combined inventories were 163 Bcf, which is 50 Bcf below last year and 7 Bcf below the prior five-year average. How did storage on these two key pipelines flip in one year’s time?

Though both Dominion and TCO storage fields stand at deficits relative to last year’s inventory levels, the Dominion deficit is much steeper (see graph). Dominion entered the winter withdrawal season on Nov. 1, 2016 at a 6 Bcf surplus to the prior year and its highest inventory for that time in the last five years: 292 Bcf.

However, after a series of strong withdrawals during the last four months of the winter season, the surplus flipped to the current 46 Bcf deficit to last year. Despite a relatively mild winter 2016/17, Dominion relied heavily on storage gas. In fact, Dominion began this summer’s injection season at its lowest inventory level since exiting the cold winter of 2014. Just as importantly, this change in inventory position has supported the strength of Dominion cash basis this year.

Source: PointLogic Energy Storage Module

 

TCO, on the other hand, ended the withdrawal season at a much lower deficit to last year. At the beginning of November 2016, TCO’s inventories were at a 10 Bcf surplus to last year. Like Dominion, this level set a record high for inventories at that time of year.

Again like Dominion, several weeks of strong withdrawals this past winter caused TCO to end the winter season at a 4 Bcf deficit to last year. However, unlike Dominion, inventory levels began the summer injection season at nearly a 13 Bcf surplus to the prior five-year average. This has exerted slight downward pressure on TCO cash basis.

As the graph below shows, the combination of upward strength at Dominion and a downward trend at TCO tightened the location differential at these two hubs since this past winter.

 

Dominion South and TCO Appalachia basis have been trading closer together since the end of 2016 and have continued the trend so far this year. At this time last year, the two hubs had exited an extremely bearish winter, and Dominion South cash basis averaged a ($0.53)/MMBtu, per OPIS Natural Gas Index. TCO’s discount to Henry averaged $0.10/MMBtu, or a 43-cent spread from Dominion South.

This year, the fields have exited again from a relatively mild winter. Over the last 16 months, a combination of increased net deliveries of gas to interconnecting pipelines targeting the Midwest and Gulf Coast, flat year-on-year demand and marginal production growth have changed the storage patterns on these two pipelines. As a result, this has altered the relationship between the two hubs. Since April, Dominion South has traded at an average of roughly a $0.27/MMBtu discount to TCO Appalachia, narrowing the spread by 16 cents (see graph below).

In general, production sourced on Dominion has grown roughly 0.18 Bcf/d  this year compared to the same period in 2016. Meanwhile, demand has remained the same, and net interconnet deliveries have climbed by 0.3 Bcf/d, year-on-year. Analysis of PointLogic Energy flow data reveals that more gas is leaving Dominion’s system to TCO’s Cornwell interconnect, Texas Gas Transmission at Lebanon and to Transco at Leidy. 

The year-on-year trend of strengthening cash basis on Dominion contrasts with TCO, which has moved a mere two cents weaker to average ($0.13)/MMBtu since April. Like Dominion, TCO’s changes to production and demand are near zero, yet net activity across TCO’s interconnects has swung by 0.9 Bcf/d. The dramatic changes have been with Tennessee Gas Pipeline, where instead of receiving gas at Broad Run, TCO now delivers gas, a change of nearly 0.4 Bcf/d. Increased deliveries of approximately 0.4 Bcf/d to Columbia Gulf at Leach, Ky., and fluctuations at other interconnects round out the difference. Also, as previously mentioned, Dominion has a new interconnect with TCO at Cromwell since September 2016, delivering nearly 0.2 Bcf/d into TCO. The transfer of some previous production from Dominion to TCO and the less severe storage situation may be reasons for the softening of TCO Appalachia cash basis. 

Winter’s Effect on Summer 2017

Cold winter weather is typically the cause of strong withdrawal activity, but this winter season was characterized by mild temperatures across the country. The Northeast region experienced its third warmest winter since 2010.

Therefore, the strong withdrawals and tightening spread at TCO and Dominion have been driven by other factors. Slower than expected growth in production, coupled with expanded take-away capacity in the Northeast, has been strongly correlated with the fields’ heavier reliance on storage. From January 2016 to May 2016, Dominion South cash basis averaged $(0.53/MMBtu) below Henry Hub, while TCO traded at a $(0.10) deficit. Since then, PointLogic Energy estimates that Northeast production has only increased by roughly 1 Bcf/d -- growing from 21.8 Bcf/d in 2016 to a current year-to-date average of 22.8 Bcf/d. This is far below a 2.6 Bcf/d increase in production between the same months in 2016 compared to 2015. 

Additionally, during the same time frame, Northeast demand softened by 2 Bcf/d from 2016 to 2017 as compared to 2016 over 2015. So while the period this year showed that the Northeast was producing an excess of about 1 Bcf/d of gas, this was actually a stronger performance than the prior year when demand softened by 4 Bcf/d during that time and created an excess of about 1.4 Bcf/d of gas. In short, despite the mild winter, the Northeast experienced a tighter supply and demand balance this year as compared to a year ago.

Looking to the summer season, should we anticipate this tight trading between TCO Appalachia and Dominion South to continue? The current storage deficit and resulting need to inject is likely supporting the current stronger basis at Dominion South. However, Dominion’s system is more dependent on the expansion of interconnected pipeline systems to find an outlet for gas downstream, while TCO’s system is more interconnected and flexible.

Given Dominion’s less flexible system, the current price support could dissipate very quickly if mild cooling degree day demand is realized this summer, and if Northeast production continues its recent upward momentum (as discussed in last month’s issue of Get the Point "Northeast Production Resurgence”). That said, most three-month weather forecasts indicate average or above-average temperatures, which could help keep upward pressure on the Northeastern hubs. 

Also, we can factor in a couple of expansion projects this summer that could provide relief to discounted basis values at TCO and Dominion, especially Energy Transfer Partners’ Rover Phase I and TETCO’s Gulf Market Expansion Phase II, which are expected to enter service in July and August, respectively. Increased production and the additional outlets to the Midcontinent and Southeast will likely keep the hubs trading closer than in the past.

PointLogic will continue to monitor Northeast storage, production and expansions very closely over this summer. You can get all the data and intelligence from our recently debuted Storage Module and from our upcoming Northeast Gas Fundamentals report series.

 

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