Energy Markets Update
Weekly natural gas inventories
The U.S. Energy Information Administration reported last week that natural gas in storage increased by 76 Bcf. There was an injection for the same week last year of 70 Bcf while the five-year average injection is 74 Bcf. Total U.S. natural gas in storage stood at 3,082 Bcf last week, 16.0% less than last year and 6.9% lower than the five-year average for this time of year.
Natural gas prices continue to surge ahead of October contract close
Natural gas pricing for the winter period trended up further in the first half of the week, as part of a seemingly relentless market surge that has been ongoing since spring of this year.
On Monday, NYMEX gas pricing for November 2021 through March 2022 rose by 50 cents/MMBtu, reflecting a 10% increase from pre-weekend trading. On Tuesday, pricing for the same period settled another 13 cents/MMBtu higher reflecting a 12% total increase from pre-weekend trading. That winter strip settled at $5.87/MMBtu at the end of trading on Tuesday.
This week’s surge is speculated to be heavily influenced by factors outside of traditional fundamentals – as it coincides with the expiration of financial options on the October 2021 delivery period, a month that was heavily traded.
However, fundamental factors have still been a significant driver in this seismic market shift, as US natural gas storage levels are below the 5-year historical average and LNG exports are at record highs with no sign of ceasing.
Outside of the US, European and Asian energy markets have risen at far greater magnitudes, and their impact on domestic gas markets are stronger than ever before. In Europe, British and Dutch benchmarks settled near $30/MMBtu for the winter season, a record high. The pricing crunch in Europe stems from legitimate concerns of resource adequacy for the winter season – as domestic productions levels are down and supply from Russia is being constricted. Increasing competition from Asia for LNG cargoes further compounds the issue.
Thus, international markets are influencing US LNG shippers to export at maximum capacity – around 10.5 Bcf/d of gas, or 10% of total production, while domestic supply/demand factors are tight. These conditions even led the Industrial Energy Consumers of America to request that the Department of Energy restrict LNG exports until the US can build storage to 5-yr average levels.
This hurricane of market factors have pushed gas markets to levels not seen in 8+ years, but it is important to note that the extreme increases are focused on the winter months – while the balance of 2022 is also up materially, pricing is much more in line with historical averages. For buyers, that is reason to be optimistic that the tight market fundamentals driving the market surge are only relatively short term conditions and at least partially speculative.
FERC approves PPL acquisition of Narragansett Electric from National Grid
On Thursday, Pennsylvania-based utility PPL announced that it received FERC approval to acquire the Rhode Island-based Narragansett Electric Co. from National Grid USA.
As a part of the approval process, FERC determined that the purchase would incur no effect on horizontal or vertical market power, nor would it have an adverse effect on rates. The proposed purchase did receive some pushback from Rhode Island Attorney General Peter Neronha, who argued that PPL and Narragansett did not include enough information in their application, yet no other major objections were presented.
PPL expects the transaction to be completed by March 2022, as the company still awaits approval from the Rhode Island Division of Public Utilities and Carriers. PPL had asked the final order to be issued by Nov. 1 in its application with the agency, so that the utility is prepared to serve during the winter period.
“We’re pleased with FERC’s decision, which puts us one step closer to concluding an acquisition we believe will drive significant value for Rhode Island families and businesses and strengthen PPL,” CEO Vincent Sorgi said in a statement. “As we await final approval, we look forward to partnering with Narragansett Electric’s talented team to deliver energy safely, reliably and affordably to Rhode Island customers.”
According to the deal, the majority of Narragansett Electric employees will stay with the company – from which they will continue to serve the area’s approximate 780,000 electric and natural gas customers. PPL paid $3.8 billion for the Rhode Island utility while simultaneously selling its UK business, to National Grid PLC, for $10.9 billion.
NSTAR Gas seeks 1st rate hike under Mass. performance-based framework
In the first exercise of its approved performance-based ratemaking, NSTAR Gas Company dba Eversource Energy, is seeking a $24.8M rate adjustment on November 1st. Such an increase would reflect a 3% increase from its current approximate rate base of $817M.
While this increase is comparatively small, the “PBR” framework, which was adopted on October 30, 2020 by the Massachusetts Department of Public Utilities, allows for NSTAR to adjust base distribution rates annually for 10 years and represents a new paradigm in Massachusetts regulatory policy.
The intention of the PBR plan is to automatically adjust rates pursuant to factors outside the company’s control, and to incentivize the company toward policy objectives related to safety and reliability, customer satisfaction and engagement, and emission reductions. It also the cost and resources associated with litigating traditional rate case filings. The PBR plan includes components such as inflation adjustment, productivity, “X” factor (a consumer dividend expected to reflect efficiency gains), and "Z" factor that incorporates the effect of all exogenous events. The PBR includes a revenue-cap formula to ensure utility ROI remains competitive. PBR factors are to be reported in the company's annual PBR filings, which are submitted by September 15 each years starting 2021.
Specifically for the first-time rate adjustment, among the total of $24.8 million increased rate, $7.3 million were associated with inflation adjustment, X factor and consumer dividend. Exogenous costs that were related to implementation of a new methodology for property tax valuations by municipalities in Massachusetts tops up to $11.7 million, with the last $5.8 million being allocated to roll-in to rate base of 2019 and 2020 non-gas system enhancement program capital additions.
PennEast gas pipeline halts development amid regulatory obstacles
This week PennEast confirmed that it will stop all further development of its 110-mile natural gas pipeline that was slated to delivery shale gas from northern Pennsylvania into Transco pipeline in New Jersey. A spokesman from PennEast said that despite securing a Certificate of Public Convenience and Necessity from FERC, it still lacked certain permits such as a water quality certification and other wetlands permits for the New Jersey portion of the project.
The decision to cease the $1 billion project is favored by New Jersey’s Governor Phil Murphy who released a statement saying “for the last four years, my administration has fought back against the unnecessary construction of the PennEast pipeline, which was wrong for New Jersey and would have destroyed acres of New Jersey's conserved land and endangered species”. The project aimed offer peak period price stabilization to major urban markets in New Jersey and Eastern Pennsylvania but never offered compelling arguments as to why it would provide long term benefits. Its demise is yet another indication of the Northeast’s waning support for new pipeline projects.
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