In a notable shift during the first six months of 2023, natural gas spot prices in Texas hubs edged closer to the standard U.S. Henry Hub pricing compared to figures from the latter half of 2022. This adjustment in the pricing gap was attributed to the reactivation of both the Freeport LNG and El Paso Natural Gas Company’s Line 2000 in February 2023, coupled with a decelerated growth in natural gas production.
Specifically, during the initial half of 2023, the Houston Ship Channel, a major trading hub in East Texas, reflected an average price that was $0.27 per million British thermal units (MMBtu) less than the Henry Hub rate. Concurrently, the Waha Hub located in the Permian Basin of West Texas showed an average deficit of $0.85/MMBtu when juxtaposed with the Henry Hub pricing, according to EIA.
Contrastingly, the latter half of 2022 exhibited a more pronounced price disparity. The Houston Ship Channel reported prices that were, on average, $1.27/MMBtu lower than Henry Hub in November, whereas the Waha Hub depicted a steeper drop, averaging $3.02/MMBtu less in December. The widened differential in 2022 can be credited to factors including an uptick in natural gas production, augmented pipeline takeaway capabilities, the discontinuation of Freeport LNG services, and various pipeline setbacks.
What factors influenced the natural gas price gap between Texas and the Henry Hub
Production Increases in 2022:
Permian Region: Natural gas production rose by 15% in 2022. This meant an increase of 2.7 billion cubic feet per day (Bcf/d) from 2021, reaching a total annual production of 21.2 Bcf/d. This was the highest yearly production ever recorded for the region.
Eagle Ford Region in Texas: The production of natural gas also increased by 14% in 2022, which is equivalent to an additional 0.8 Bcf/d.
New Pipeline Capacity in 2021:
In 2021, Texas saw an addition of 8.5 Bcf/d in natural gas pipeline capacity.
About 4.1 Bcf/d (a bit less than half of the added capacity) aided producers in the Permian region to deliver more natural gas to areas consuming it along the Gulf Coast.
Supply and Demand Dynamics:
The increased deliveries of natural gas from the Permian, combined with the shutdown of the Freeport LNG export terminal in June 2022, led to an excess supply of natural gas in East Texas. In simple terms, there was more natural gas available than there was demand for it.
This oversupply affected prices at the Houston Ship Channel and widened the price difference compared to the Henry Hub benchmark in the second half of 2022 (2H22).
Price Dynamics in West Texas:
There was an increase in the capacity to transport or "take away" natural gas from the Permian region in 2021. This helped in reducing the price difference between the local Waha Hub and the national benchmark, Henry Hub.
However, in the latter half of 2022 (2H22), there were interruptions in the flow of natural gas due to maintenance on the pipelines in the Permian region. This interrupted flow led to fluctuating prices at the Waha Hub.
Another factor was the shutdown of a major pipeline, the El Paso Natural Gas Company’s Line 2000, from August 2021 to February 2023. This further reduced the flow of natural gas moving westward from the Permian region.
As a result of these issues, the price difference (or discount) at the Waha Hub compared to the Henry Hub became more pronounced and lasted longer compared to the difference between the Houston Ship Channel and the Henry Hub.
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