How South Texas market shifts will create gas price divergence

    Permian and Eagle Ford gas production growth are meeting robust LNG export in South Texas. What does this mean for Katy, Agua Dulce and HSC price hubs?

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    Three natural gas price hubs in South Texas – Katy, Agua Dulce and Houston Ship Channel (HSC) – have historically traded in a tight range of one another. That’s due to the current state of pipeline connectivity in the South Texas region and relative geographic proximity.

    As North American gas production booms in the Permian and Eagle Ford, this dynamic will shift. Before long, the pricing trends in Katy and Agua Dulce will peel away from the values at the Houston Ship Channel.

    The reasons for the forthcoming divergence are complex and principally driven by the ‘last-mile’ limitations of the pipeline grid between Katy to HSC, and Agua Dulce to HSC. Much of the future story will depend on future takeaway pipeline buildout and destination of Permian projects. The production growth spurred by these new pipelines will also play a role.

    As larger supply volumes hit the hubs in Agua Dulce and Katy, which are situated west of HSC and closer to the Permian, their prices will fall. 

    Three natural gas trade hubs, three distinguished characteristics

    Each of the three trade hubs in the South Texas gas market have distinct characteristics and purposes.

    At Agua Dulce, supply and demand are set to increase – but timing of market changes are crucial to pipeline flows and price movements. Pipelines directly downstream of the hub deliver gas to Mexico, tie in to the Corpus Christi LNG header system, and also have northbound pipeline delivery.

    Katy’s hub is a gateway for the greater Houston market. It’s the primary supply stopover for Permian-produced gas – basically a supply hub, rather than demand. In contrast, the HSC location is driven by export demand for LNG cargoes. Its price relationship will be leveraged heavily on pipeline access to Katy and Agua Dulce.

    What drives South Texas gas prices in the future?

    Our price outlook to 2040 is divided into near-term, medium-term and long-term forecasts. The trendline shows the price divergence emerges in the early 2020s, and gradually widens in the mid-2030s.

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