Houston (Platts)--9Feb2010/441 pm EST/2141 GMT

A significant shift in natural gas supply sources and new pipeline capacity over the past two years reversed West-to-East price relationships beginning last summer -- a trend that analysts expect will continue this year.

Pipeline development in the past several years has been geared to capture the premium prices offered in the Eastern markets. But those traditional premiums were somewhat upended last summer when the price at Henry Hub collapsed and several West Coast market hubs -- Northwest Pipeline's Sumas, Washington, Pacific Gas & Electric city-gate, Southern California Gas and even Alberta's AECO hub -- climbed to positive basis to Henry Hub and to competing markets in the Upper Midwest, Appalachia and even New York.

Moreover, they continued to carry premiums even once winter heating demand arrived.

The daily cash price at Northern California's PG&E's city-gate in 2009 averaged at a 20 cent premium to Chicago city-gates and a 2 cent premium to Columbia Gas Transmission in Appalachia, compared with discounts of 20 cents and 58 cents, respectively, in 2008, Platts pricing data shows.

PG&E also narrowed the discount to Transcontinental Gas Pipe Line's zone 6-New York by about half in 2009, averaging about 80 cents back, compared with $1.52 in 2008 and an average of $1.40 over the past five years.

But Western markets will soon gain access to more Rockies supply when El Paso Corp.'s Ruby Pipeline begins moving gas to the West Coast in the spring of 2011.

PG&E's Malin, Oregon, hub, where Ruby would terminate, and Sumas also strengthened relative to Chicago and Columbia Gas, Appalachia -- going from discounts of $1 or more in 2008 to less than 50 cents last summer, after trading at premiums to the eastern markets for a majority of days from August to about mid-December.

The spread reversals were partly due to extreme heat in the West for a prolonged period last summer, followed by an extremely cold October that brought early heating demand to the region. Comparatively, the East had relatively mild weather and lower demand overall.

Beyond last summer's unique weather pattern, however, analysts believe the change was more a result of a lasting shift in supply basins rather than demand.

"There absolutely is a fundamental shift in West-to-East premiums underway," RBS Sempra Commodities Senior Vice President Brison Bickerton said. "The basis adjustment is less about a demand pull from the West as it is a story of a Western supply decline relative to the East."

Eastern supply has risen sharply thanks to new shale gas plays that ramped up in the Midcontinent and Gulf Coast regions, including the Woodford, Fayetteville, Haynesville and Marcellus shales. The region also experienced massive development in pipeline capacity to take that gas to market.

"The new shale gas coming to market is essentially east[ern] gas, located near the Henry Hub or in the case of the Marcellus Shale near current eastern demand centers," Bickerton said.

As a result, the East became inundated with supply and the "Henry [Hub price] dropped very rapidly," said Ed Kelly, vice president of North American gas and power at energy consultant Wood Mackenzie.

Meanwhile, shipments from west to east have increased with the extension of the Rockies Express Pipeline system, just as Rockies production has been cut back due to the stalled economy.

Perhaps the biggest factor in boosting regional prices, however, has been the decline in imports from western Canada. "We would view the primary drivers of new West premiums being the declines seen in western Canada, the Rockies and Waha all driven by declining rig counts," Bickerton said.

"The past summer was an early indicator of the longer-term trend: the supply decline in western Canada," Kelly added. "The premiums [in the West] have been driven first and foremost by the AECO price.

Alberta gas supply is expected to decline by between 750,000 Mcf/d and 1 Bcf/d on average this year from 2009, according to Kelly, as California demand grows at a rate of about 1% annually to 7 Bcf/d by 2020.

Tighter supply has also meant lower stocks than year-ago levels at some regional storage fields, putting added upward pressure on prices, one regional trader said. "Storage levels are weak in the West. Southern California Gas is around 82 Bcf in the ground; that is almost 15 Bcf under last year."

A rebound in Rockies and Waha production as economic conditions improve could bring back Western discounts, but the next big price equalizer is likely to be Ruby Pipeline with a proposed initial capacity of 1.5 Bcf/d. "We would expect more capacity to increasingly equalize prices," Bickerton said.

Until then, many expect West basis strength to continue this summer, particularly given recent hydro supply forecasts that indicate an increased dependence on gas supply for power-generation demand this summer.

The Platts-ICE Forward Curves as of Friday showed cash-equivalent values for the PG&E city-gate at between 20 and 30 cent premiums to both Chicago and Columbia Gas, Appalachia, through the three-year curve. Northwest Sumas showed discounts to Chicago and Appalachia for the summer but the winter curves were at between 2- to 10-cent premiums through at least winter 2011-2012.

--Sheetal Nasta, sheetal_nasta@platts.com