Although there are six gas pipelines that supply natural gas to the New England region, there is limited pipeline capacity to deliver low-cost Marcellus and Canadian gas supplies to New England because the region is at the “end of the pipeline.” As gas demand has risen, pipeline capacity has remained static and become constrained, particularly during cold winter months. Whereas ten years ago pipeline deliverability to the region was only constrained a few days a year, last year capacity on some pipelines was at 100% during the coldest winter days. The constraint has restricted gas flows, increased competition for supply and led to higher gas prices for consumers. The only viable solution to increase gas supply, thereby lowering gas prices, is through the construction of new gas pipelines to New England.
The relatively low price of domestic gas, its environmental benefits and the shutdown of regional coal plants has increased demand, further adding to the constraints that the pipeline transmission system can accommodate. Consequently, the natural gas pipeline system in New England has not kept pace with the increase in demand, the declines in the Canadian offshore gas fields, and new regional gas sources.
In response to these changing market conditions and supply/demand imbalance, the New England Governors has jointly proposed additional pipelines to the region that would increase natural gas supplies by about 1 Bcfd. Studies have indicated that an additional 1Bcfd of natural gas would be needed to bring the costs of natural gas in New England in line with adjacent areas of the country.
Why LNG Exports Helps Lower New England Gas Prices
The construction of a new gas pipeline to New England requires customers who are willing to commit to long-term 20-year gas pipeline capacity contracts. This obligates the customer to buy the same quantity of pipeline capacity every day for 20 years, regardless of their gas demand requirements. There are few such customers in the region that can financially commit to such a contract.
Only customers with a firm consistent gas supply requirement, such as industrial customers, or those with the ability to pass through pipeline capacity charges can commit to such contract terms. In New England, only local gas companies, such as a Bangor Gas or NSTAR, have been able to fulfill these conditions. Significant industrial load is non-existent in New England and power producers are unable to pass on pipeline capacity costs to their power customers due to regulatory restrictions. As a result power producers instead buy gas priced on a spot basis that is often very expensive during cold winter days. Higher spot gas prices are a principal reason why New England power prices are among the highest in the US.
In comparison, an LNG export project can commit to a long-term gas pipeline capacity contract as LNG export volumes are also sold through a 20-year agreement. The commitment by Downeast LNG to buy 300 million cubic feet per day (mmcfd) of pipeline capacity, together with the commitment by local gas companies, will support the construction of additional pipeline capacity to the region increasing gas supply, liquidity and lowering gas prices. The new pipeline capacity will be additive to current capacity and will not reduce the availability of gas pipeline capacity for current consumers. Most importantly the construction of new pipeline capacity is typically oversized and is expandable with the addition of compression. Customers will have another supply option from which to buy short-term or interruptible gas.
Downeast LNG Gas Requirements and Capacity Release
Downeast LNG customers will also contract to buy 300 mmcfd of firm US or Canadian sourced gas supply to fulfill feedgas and energy requirements for the terminal, using firm gas pipeline capacity to transport gas to the terminal. Downeast LNG will contract for 300 mmcfd of firm gas pipeline capacity, as noted above. Downeast LNG further commits to release up to 20 days of pipeline capacity annually to New England consumers, thereby increasing gas supply and reducing high winter spot gas prices in the region on the coldest winter days. Downeast LNG will create a FERC-approved auction mechanism to sell as much as 200 mmcfd of gas. Power producers and other consumers in need of short-term gas supply will thus have an additional supply option.
If required in the future due to changing market conditions, the bi-directional design of the Downeast LNG terminal allows the facility to reverse flow and provide natural gas to the pipeline transmission system during the winter peak demand months, alleviating shortages and helping to reduce costs to consumers. In effect, the Downeast LNG Terminal could serve as a major peak shaving facility during the peak winter demand months. Should New England market conditions dictate, the terminal has the capability of importing and revaporizing imported LNG for use by New England consumers.
The Project could serve as a peaking gas resource to help manage this regional demand, especially given the absence of significant regional natural gas storage. The Project will also enable the delivery of gas to isolated New England markets in need of supply. Moreover, the bi-directional nature of the project will help ensure that should current market conditions of oversupply change in the future, there will be a means for importing and revaporizing foreign-sourced LNG for consumption in U.S. markets.