The structure of the U.S. natural gas market has evolved over time and become the most competitive, efficient, transparent and liquid natural gas market in the world. In the late 1980s and early 1990s, the deregulation of natural gas wellhead prices revolutionized the industry and transformed the wholesale natural gas market.
The structure of the U.S. natural gas market has evolved over time and become the most competitive, efficient, transparent and liquid natural gas market in the world. In the late 1980s and early 1990s, the deregulation of natural gas wellhead prices revolutionized the industry and transformed the wholesale natural gas market. Market liberalization allowed the price to be determined based on market dynamics and demand and supply interaction.
At the center of this evolution is Henry Hub, located in Erath, La. The site is a nexus of several interconnections with interstate and intrastate natural gas pipelines. It offers natural gas shippers and marketers ready access to pipelines serving markets in the Midwest, Northeast, Southeast and Gulf Coast regions.
In April 1990, NYMEX played a groundbreaking role in the market transformation by introducing Henry Hub Natural Gas futures as a risk management and price discovery mechanism.
The product was designed to mirror commercial practice and the underlying physical market. As the first standardized natural gas futures contract, Henry Hub futures became the catalyst for the growth of financial natural gas trading in the U.S. Unlike the physical market, the futures market offers price discovery across time reflected in the term structure or the forward curve. The futures contract is listed on a monthly basis for the next 12 years, allowing visibility of market expectations for future natural gas prices.
Today, it is the world’s most traded natural gas futures contract, reaching more than 430,000 contracts traded per day.
Source: CME Group
A Strategic Location
The commercial relevance of Henry Hub is the result of its strategic location and logistical infrastructure. This physical aspect is a crucial component to understanding the role of Henry Hub futures as the pricing benchmark for the natural gas market.
Henry Hub is situated in a major onshore production region and is also near an offshore production area. As indicated in the below chart, the monthly average natural gas production in Texas has increased from 541,989 million cubic feet (MMcf) in 2017 compared to 713,196 MMcf in Q1 2021. This represents 32% of U.S. marketed production, making Texas the state with the highest natural gas production.
Louisiana produced a monthly average of 177,324 MMcf in 2014 compared to an average of 257,929 in 2021. This represents 58% of U.S. marketed production.
In addition, the region has also relied on natural gas produced in the Federal Offshore region. The following chart shows that the monthly average offshore natural gas production has decreased over the years from 100,374 MMcf in Q1 2017 to approximately 67,930 MMcf in Q1 2021.
In addition to the ample supply that is available and accessible, the Southwest region has one of the most developed and extensive pipeline networks in the country. This allows natural gas to be moved from supply basins and exported to major consumption markets. This highly integrated network is served by both interstate and intrastate natural gas pipelines. In Texas, intrastate and interstate pipelines span over 45,000 miles and 13,000 miles, respectively. Louisiana’s distribution system also plays a pivotal role in delivering natural gas to major markets via several interconnections to interstate and long-haul pipelines such as the Texas Gas Transmission Company and the Trunkline Gas Company.
From Production to Consumption
Henry Hub is owned and operated by Sabine Pipe Line LLC and its affiliates as a full-service header system which offers various receipt and delivery capabilities, hub management services, and an extensive interconnection to one of the most important U.S. pipeline structures.
Sabine Pipe Line is a bidirectional mainline pipeline that stretches from Port Arthur, Texas, to Henry Hub in Louisiana. As an interstate pipeline that is certified as an open-access gas transporter, it is directly connected to four industrial consumers and one producer. Through its transportation program, Sabine provides transportation services for both Henry Hub and Sabine’s mainline. This allows a shipper to transfer gas from one pipeline to another. In addition, the hub offers a variety of hub services such as balancing to cover short-term natural gas needs and title transfer, which involves the progression of natural gas ownership from party to party.
Henry Hub is interconnected to eight interstate pipelines and three intrastate pipelines. These pipelines are part of the highly integrated U.S. transmission grid, which transports natural gas from production and processing areas to storage facilities and distribution centers and then onto consumption markets.
Source: EnLink Midstream
The region also has extensive offshore gas pipelines, which move natural gas from Deepwater areas to onshore gathering and processing plants. The region is currently experiencing significant developments in midstream business and pipeline infrastructure to displace the excess shale gas to new markets.
Henry Hub also has a direct connection to storage facilities, including Jefferson Island, Acadian, and Sorrento. These facilities are salt-dome caverns characterized by high-deliverability and high cycling rate, which allow for several withdrawal and injection cycles each year.
Additionally, Henry Hub has access to other storage facilities in the region through interconnected pipelines. The region already has significant storage sites while many others are in the process of development. These facilities represent a fundamental conduit that offers flexibility in withdrawals and injections based on demand and supply dynamics to meet the needs of consumers.
The following chart exhibits the underground storage volume collated by the EIA for Texas and Louisiana where there are more salt-dome facilities than any other part of U.S. During the injection season of 2020 (April-October), total stock levels reached 4.6 million MMcf and 5.2 million MMcf in Louisiana and Texas respectively. These levels represent 9% for Louisiana and 10% for Texas of U.S. total storage volume during both seasons.
From a demand perspective, the U.S. Gulf Coast (USGC) is undergoing a fundamental shift and becoming a major consumption destination. The abundant natural gas and the low-price environment have transformed fuel economics and have increased the use of natural gas as a feedstock by the electricity, industrial and export sectors.
According to the EIA, natural gas was the largest fuel source for U.S. net generation of electricity, reaching approximately 1.617 trillion kilowatt hours (kWh) in 2020. This figure is expected to increase due to high coal-to-gas switching, the retirement of coal-fired generators, and environmental regulations. Specifically, Texas is turning to more natural gas to meet its growing power generation demand and is building a considerable number of natural gas-fired power plants. In addition, natural gas demand from the industrial sector (e.g., fertilizer, petrochemical and steel) is noticeably expanding. Most of the significant investments and infrastructure expansion projects are situated in Texas and Louisiana.
Demand patterns are changing. Henry Hub, by contrast, remains a constant. With its strategic location and interconnectedness to U.S. markets, it is a reliable indicator of natural gas supply and demand. And as the delivery point for Henry Hub futures, it is the critical location providing price discovery for an increasingly important energy source.