On April 7, 2017, Dominion's Cove Point LNG terminal received FERC approval to begin accepting fuel gas into their Maryland facility. No doubt this is an important step in the process of bringing online its liquefaction capabilities and with it 700 MMcf/d of new demand to the Atlantic Seaboard. Cove Point's gas was originally slated to be sourced from Transco's Atlantic Sunrise project. However, like most gas pipelines in Appalachia, the project has undergone a year-long delay and will not be ready to supply the Cove Point terminal this year. So, with Cove Point set to begin commissioning in a few months, where will Cove Point source its gas? And more importantly how will Transco Zone 5 basis respond to this new source of regional demand?
First, the impact from LNG export terminals should not be understated. Cheniere's Sabine Pass LNG terminal has already exported more than one hundred cargoes from its Louisiana facility. Cumulatively, deliveries to the facility have totaled almost 0.5 Tcf in its year-and-a-half history. As Cheniere stated in their recent Q1 2017 earnings call, they are now the largest consumer of natural gas in the US. The graphic below shows historical deliveries to the Sabine Pass facility, hitting recent records of 2.4 Bcf/d.
So, keeping that context in mind, Cove Point's recent approval to begin accepting fuel gas deliveries puts them about three months out from beginning to take material gas deliveries as part of the commissioning process. And if Sabine Pass is any example, after three months those deliveries can ramp up to capacity quickly. So where, will Cove Point source its gas from? The map below shows the Cove Point LNG terminal and Cove Point Pipeline, as well interconnecting TCO and Transco pipelines.
Originally, at least half of Cove Point's gas was to come from Northeast Pennsylvania via Atlantic Sunrise and a firm sales arrangement with Cabot (NYSE: COG). However, with that project delayed by a year from a mid-2017 in-service to a mid-2018 in-service the terminal will have to compete for gas from surrounding areas.
Further complications beyond Atlantic Sunrise delays exist as well. As recently as this winter, the Cove Point terminal acted as an LNG import facility and took three cargoes of LNG totaling 9.3 Bcf that it then pushed onto Transco via Cove Point pipeline to meet winter demand in the Washington DC area. Additionally, the pipe has been acting as a middle man for gas coming off TCO to be delivered to Transco. The graphic below shows a summary of historic supply and demand on Cove Point Pipeline. The previous year's system demand, as well as deliveries to Transco, are projected forward (recall last winter was milder than normal, so this demand could be materially increased if normal weather re-emerges), while LNG demand from Cove Point is BTU Analytics' forecast.
To serve this coming increase in demand on the Cove Point system, Dominion will be expanding Cove Point Pipeline's receipt interconnects with TCO and Transco from approximately 400 MMcf/d of receipt capacity up to 860 MMcf/d. However, since the pipe has been delivering gas onto Transco, this means it can no longer act as a supply to Transco and Transco will then have to source gas from elsewhere. This situation will become even more dire if the LNG facility runs at high utilization and/or we have a moderate to severe winter.
This supply issue should resolve itself if Atlantic Sunrise comes online as planned in mid-2018 and more Northeast Pennsylvania gas is making its way down the Eastern Seaboard. However, until then, Cove Point will have to fight for limited supply. All this means is that Transco Zone 5 prices will have to rise to incentivize gas to enter and stay in the region. How much will prices have to rise? See the upcoming edition of BTU Analytics' Northeast Gas Outlook to find out.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.