Danger Zone - The Outlook for the Appalachian Natural Gas Market

There was no shortage of drama in the U.S. natural gas market last week. The February Henry Hub CME/NYMEX contract expired in a blaze of glory after frenzied short-covering led to the largest single-day percentage gain since Henry futures began trading in the 1990s. The Northeast was bracing for a weekend “bomb cyclone,” a particularly gnarly nor’easter that brought frigid temperatures and threatened to disrupt the market just as heating demand spiked. But there was another, more subtle but still seismic event that occurred, one that is likely to reverberate well beyond the near-term horizon. Namely, the Equitrans Midstream-led, 2-Bcf/d Mountain Valley Pipeline — the only major expansion project left for increasing egress out of the Appalachian gas supply basin — lost two key federal permits, all but ensuring that the long-delayed project will miss its latest target in-service date of this summer, and potentially be held back another year, or more. In our Top 10 Prognostications for 2022 blog, #7 predicted more severe capacity constraints and weaker basis differentials for Appalachian gas producers. This is the latest indication that things could get worse — and sooner — than previously expected. In today’s RBN blog, we focus on our latest outlook for Appalachia’s gas takeaway constraints and basis pricing.

Northeast natural gas production in 2021 to date has averaged 34 Bcf/d, up 1.4 Bcf/d year-on-year, and the higher gas price environment currently is signaling more upside to production in the years to come. At the same time, downstream feedgas demand from LNG export facilities is at a record high and also headed higher as more liquefaction capacity is set to come online in the coming months. So, despite lower-than-normal inventory levels in the Northeast, outflows from the Appalachian basin have soared to new highs this year, and utilization of outbound pipeline capacity is up to an average 90%, a level we haven’t seen since the 2016-17 timeframe. Unlike 2016-17, when there was a slew of major pipeline projects to expand egress, now there are just two or three at most — and two of those are greenfield projects that face an uncertain future. As such, spare exit capacity is getting increasingly sparse, and Appalachian producers are bound to hit the capacity “wall” in the next two years. When will the Northeast run out of exit capacity and how bad could constraints get? Today, we provide highlights from our new Drill Down report, which brings together our latest analysis on Northeast gas takeaway capacity and flows.

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.