This year has been a mixed bag for Appalachian natural gas producers. Outright prices in the region are higher than they’ve been in a few years, thanks to lower storage inventory levels and robust LNG export demand. However, regional basis (local prices vs. Henry Hub) is weaker year-on-year as higher production volumes have led to record outbound flows from Appalachia and are threatening to overwhelm existing pipeline takeaway capacity. Last month, Equitrans Midstream officially announced that the start-up of its long-delayed Mountain Valley Pipeline (MVP) project will be pushed to summer 2022 at the earliest. Then, just last week, outbound capacity took another hit as Enbridge’s Texas Eastern Transmission (TETCO) pipeline was denied regulatory approval to continue operating at its maximum allowable pressure, effectively lowering the line’s Gulf Coast-bound capacity by nearly 0.75 Bcf/d, or ~40%, for an undefined period. Today, we consider the impact of this latest development on pipeline flows, production, and pricing.
Over the past few months, in our Headed for Heartbreak series, we’ve been discussing the Appalachian gas market’s gradual march toward worsening pipeline constraints and widening price discounts. It began last year when high storage inventories, demand constraints, and resilient production levels led to oversupply and record-low prices. Producers opted to shut in existing wells, particularly during the spring and fall shoulder seasons, and wait for higher prices in winter and 2021. Despite the shut-ins, however, prices at Appalachia’s benchmark hubs, Eastern Gas South (EGS; formerly Dominion South) and Tennessee Gas Zone 4 Marcellus (TGP Z4), fell to less than $0.30/MMBtu at one point in the fall, according to the NGI Daily Gas Price Index.
This year, the inventory levels are much lower, both intra-regionally and for the Lower 48 overall, and outright prices in the region are generally running nearly $0.90/MMBtu higher year-on-year on average. Storage injections have been slower than usual, and to the extent that they are being deferred to later in the season, storage will help absorb excess supply in the fall when Northeast demand troughs again. However, given the higher prices, Appalachian gas production is maintaining a surplus of 1.7 Bcf/d vs. last year so far this injection season. Appalachia’s outflows this spring have been at record highs, with takeaway pipelines flowing at 90% or more of capacity on most days. So the threat of seasonal pipeline constraints still looms over the market, and the latest market developments have only heightened it. We discussed the MVP delay last month in Slippin’ and Slidin’. Today we’ll address the most recent snag for Appalachian takeaway: TETCO’s capacity issues.
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