Turn the Page - Producer Restraint, Tighter Balances Disrupt Appalachian Gas Market Trends

Before the bullish winter of 2021-22, it appeared the Northeast natural gas market was headed for familiar territory: worsening seasonal takeaway constraints and deeper, constraint-driven price discounts starting as early as this spring. Instead, the market went in the other direction the past few months. Takeaway utilization out of Appalachia has been lower year-on-year and, for the most part, Appalachian supply basin prices have followed Henry Hub higher even as that benchmark rocketed to 14-year highs. That’s not to say that constraints out of the Northeast aren’t on the horizon. But the market is now poised to escape the worst of it this year, despite the completion of the last major takeaway pipeline project in the region, Mountain Valley Pipeline (MVP), being pushed out another year or longer, if it crosses the finish line at all. In today’s RBN blog, we provide an update on regional fundamentals and what recent trends mean for gas production growth and pricing in the region.

As we’ve discussed many times in the RBN blogosphere — mostly recently in our latest discussion of the MVP project in Will It Go Round in Circles? — the Appalachia production basin has long struggled with midstream constraints. For much of the Shale Era, Appalachian producers were champing at the bit to grow production with every little piece of incremental takeaway capacity that came online. The situation became particularly dire by the middle of the last decade, when Northeast supply outgrew intra-regional demand (see One Step Closer) and local production growth became constrained by producers’ ability to access markets outside the Northeast region. Production growth “slowed” to an average of 2.5 Bcf/d each year in the 2015-17 timeframe, compared with close to 4 Bcf/d in 2013 and 2014, as midstream capacity couldn’t keep up. Producers got a respite in 2018-19 as major capacity additions were completed and for the first time in years there was unused egress out of the basin, easing constraints and allowing Appalachian prices to strengthen relative to Henry Hub. But with conditions improving, production took off again, increasing by more than 4 Bcf/d in 2018, once again resuming the march toward midstream constraints and weaker prices. The pandemic slowed growth, of course, as rig counts fell and domestic and export demand evaporated, but Northeast production still grew by nearly 1 Bcf/d in 2020 and nearly 2 Bcf/d in 2021 to a record of 35.5 Bcf/d by December 2021, bringing with it record outflows.

So, it appeared that the region was again moving toward worsening constraints in 2022 and beyond (see our Headed for Heartbreak series) — only this time without the assurance that a spate of pipeline capacity additions would eventually come along to alleviate the bottlenecks. As we said in Up Around the Bend, the bulk of the FERC-approved expansions are now completed and online, with the last big one — MVP — facing an uncertain future and in danger of being canceled altogether. Moreover, the capital investment and regulatory appetite for hydrocarbon development in the Northeast has largely dried up, particularly in light of the challenges faced by MVP and other greenfield projects before it that were ultimately canceled due to similar challenges. Earlier this month, the Biden administration proposed reinstating state and tribal authority given under the Clean Water Act to block energy and other infrastructure projects based on their potential to negatively impact the water quality of local rivers and streams. (The Trump administration had implemented a rule in 2020 to limit that authority, which had previously been in place since the early 1970s.) While Russia’s war on Ukraine has triggered concern about energy security globally and softened sentiment somewhat toward hydrocarbons, that hasn’t saved MVP from the staunch opposition by environmental activists or their legal challenges. Nor has it done much to alleviate the fears of any other midstreamer that might attempt to tap additional Appalachian supply.