The Fiscal Responsibility Act (FRA) revived Mountain Valley Pipeline’s (MVP) prospects of being completed this year, but the outlook for new, large-scale natural gas takeaway projects in the Northeast beyond MVP hasn’t changed. What has changed, however, is how Appalachian natural gas-focused producers respond to pipeline constraints and lower prices. Gone are the days of drilling with abandon, crushing supply prices and assuming the necessary pipeline capacity will eventually get built. Instead, producers have demonstrated a willingness to slow drilling activity, delay completions and choke back producing wells in the short-term to manage their inventory during periods of lower gas prices. In today’s RBN blog, we lay out our view of what that shift in producer behavior will mean for Northeast supply, demand and pricing trends in the long-term.
Before we get into the details of today’s blog, we need to let you know it is based on our latest Backstage Pass Fundamentals Webcast. The webcast discusses our latest analysis of Appalachia fundamentals.
In the last decade, Appalachian natural gas production rocketed up to more than 35 Bcf/d, often straining infrastructure and pummeling local price basis. The situation became particularly dire by the middle of the last decade as Northeast supply surpassed intra-regional demand (see One Step Closer). At that point, producers became constrained by their ability to access markets outside the Northeast region. As regional supply growth outpaced takeaway capacity additions, 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 gains in 2013, and again in 2014.
A spate of pipeline capacity expansions from 2017-19 helped alleviate the constraints. For the first time in years, there was a little space in egress out of the basin, and Appalachian prices strengthened relative to Henry Hub. But by late 2019, the region was once again marching toward midstream constraints and weaker prices — this time with a dwindling number of pipeline projects on the horizon. The pandemic and the resulting lockdowns abruptly interrupted that march, however. As domestic and export demand evaporated and uncertainty loomed, gas prices tanked, rig counts fell and producers did something they hadn’t done on a large scale before in the Shale Era — they demonstrably choked back producing wells (see dashed black ovals in Figure 1). Despite those major interruptions, Northeast production still grew by nearly 1 Bcf/d in 2020 (red line) and nearly 2 Bcf/d in 2021 (light-blue line) to a record of 35.5 Bcf/d by December 2021, bringing with it record outflows.
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