Up Around the Bend

It’s no secret to anybody paying attention to U.S. natural gas markets that Appalachia has long been bedeviled by midstream constraints, often leading to deep gas price discounts. There have been brief respites when new capacity has come online, allowing more gas to flow out, but if you've been reading our blogs and natural gas reports lately, you know we've been sounding the alarm about the growing specter of constraints reemerging. Across the country, the boom in pipeline reversals, greenfield projects, and pipeline expansions that characterized much of the 2010s is pretty much over, with just a couple of approved expansions left, and it’s gotten much harder for projects offering additional capacity to gain traction, especially in the Northeast. In today’s RBN blog, we consider the big questions facing the region: how fast will Appalachian gas production grow, how much running room do producers have left, and what are the implications of midstream constraints for forecast supply growth?

Market signals are suggesting that we’re on the cusp of another midstream revival. Higher crude oil and natural gas prices are prompting producers to ramp up output, and higher production will lead to increasing midstream constraints and cratering supply prices. We’ve seen this reel before and in past cycles, midstreamers would swoop in right about now with plans for a host of pipeline expansions to relieve bottlenecks and balance the market again. The problem is that for capacity to get built, you need producers to sign up with long-term commitments, and that’s the catch. Wall Street has drawn a hard line when it comes to capital and environmental discipline in the energy industry, and regulatory support for hydrocarbon newbuilds has waned. This is especially a problem for two major basins — the Permian and Marcellus/Utica — but is liable to affect producer behavior across the Lower 48. In today’s RBN blog, we take a closer look at how this will play out at the basin level, starting with the Permian.

The U.S. natural gas market is primed for supply growth. The Lower 48 supply-demand balance is the most bullish it has been in years. Exports are at record levels and poised to increase with additional terminal expansions on the horizon, while international prices have recently notched record highs. Henry Hub gas futures prices are at the highest in over a decade. So, producers will unleash a torrent of natural gas, triggering a midstream build-out like we’ve seen in the past, right? Not so fast. The world has changed. For additional capacity to be built, you need producers or utilities to commit to use it. But Wall Street has drawn a hard line when it comes to capital and environmental discipline in the energy industry and regulatory approvals can also be an uphill battle. Therein lies the conundrum. More midstream capacity is needed for production to grow, but it’s harder than ever for that infrastructure to get built, which means constraints for some period of time are all but a certainty. Natural gas may not be as constrained as crude oil, but it is already butting up against capacity in parts of the Permian and Marcellus/Utica. And in the crude-focused Permian, those gas constraints will also cascade to crude production. In today’s RBN blog, we consider the implications of the new world order.