Headed for Heartbreak, Part 2 - The Northeast Gas Market's Slow March Toward More Takeaway Constraints

After a two-year reprieve from a nearly decade-long period of severe pipeline constraints and debilitating prices, Northeast natural gas producers are again headed for a constraint-driven market in the next five years. Appalachian supply prices last year weakened relative to national benchmark Henry Hub, reversing the gains of the past few years, and fell to historic lows as oversupply conditions prevailed and at times strained available takeaway capacity. All that despite the rig count hitting a four-year low and shale producers’ best — even unprecedented — efforts to respond to low prices with short-term production cutbacks during the shoulder seasons. So what happens when rig counts and production recover in the coming years? How long before pipeline constraints worsen and what are the prospects for new pipeline development? Today, we begin a blog series detailing recent supply-demand trends in the region and our outlook for 2021 and beyond.

U.S. natural gas production in recent days has plunged more than 3 Bcf/d. While some Gulf of Mexico offshore and Gulf Coast production is still offline from the recent tropical storms, the bulk of these declines are happening in the Northeast, where gas production has dived 2 Bcf/d in the past week or so to about 30.2 Bcf/d, the lowest level since May 2019, pipeline flow data shows. Appalachia’s gas output was already down earlier in the month, as EQT Corp. shut in some volumes starting September 1. But with storage inventories soaring near five-year highs, a combination of maintenance events and demand constraints are forcing further curtailments of Marcellus/Utica volumes near-term. Today, we provide an update of Appalachia gas supply trends using daily gas pipeline flow data.

Natural gas pipeline takeaway constraints out of the Northeast worsened in 2020 despite producer cutbacks in the region as high storage levels and weaker demand led to record volumes of Appalachian gas supplies needing to find outlets in other regions last fall. This year, storage levels are lower and could absorb more of the surpluses during injection season. However, Appalachian gas production so far in 2021 has been averaging higher than last year; and, gas prices are higher year-on-year, reducing prospects for the kinds of producer curtailments we saw last year. As for the “pull” from downstream demand, LNG exports along the Gulf Coast aren’t expected to experience the slump from cargo cancellations seen last summer. In other words, Appalachia’s outbound flows are likely to be robust, setting the stage for takeaway constraints and weak prices, particularly during the spring and fall shoulder seasons. How much outbound capacity currently exists and how much room is there for growth? Today, we continue our series on the Northeast gas market with an update on Appalachia’s southbound takeaway capacity and outflows, starting with a detailed look at the gas moving to the Southeast and to the Gulf Coast.