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Shattered Dreams - After MVP Setback, Is the Appalachia Gas Forward Curve Wrong?

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.

For those holding onto a glimmer of hope that the long-delayed Mountain Valley Pipeline (MVP) — a big and important greenfield Appalachia natural gas takeaway project — would finally come to fruition this year, it’s safe to say those dreams were shattered last week. On January 25, the U.S. Court of Appeals for the Fourth Circuit vacated federal permits from the U.S. Forest Service and Bureau of Land Management that were needed to complete a 3.5-mile stretch of the mainline through the Jefferson National Forest along the West Virginia-Virginia border. The ruling said the permit approvals were premature — issued before the Federal Energy Regulatory Commission’s (FERC) environmental assessment — and failed to comply with the Forest Service’s 2012 Planning rule. The decision effectively sends the project back into the review process for the second time since construction began in 2018.

Why the spotlight on MVP? Well, as we said in Up Around the Bend, Part 3, the Appalachia supply basin is increasingly constrained by gas takeaway capacity, and as constraints worsen, regional production and outflows to growing demand markets, like LNG exports, will be largely paced by new takeaway capacity out of the basin. As the last viable major takeaway project, MVP’s incremental capacity represents — or should we say represented? — the hope of at least deferring severe constraints for a bit longer, especially as regional production sets new highs this year.

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