Midstreamers in recent years have been in overdrive to de-bottleneck the Marcellus/Utica natural gas supply region as well as other growing gas supply basins and connect producers to where the demand is increasing. Significant transportation capacity has been added in recent years and much more is on the way. Constraints are starting to ease and producers are finding relief. But with production growing again, there are signs of potential new bottlenecks on the horizon. The RBN Growth Scenario estimates that Lower-48 gas production could increase to 92 Bcf/d by 2022. Demand is expected to grow too — primarily from exports — but no more (and potentially less) than supply in the same timeframe, leaving the market in a precarious equilibrium over the next five years. Thus, it will be all the more critical that incremental supply can access what new demand there will be. At the same time, demand growth will be concentrated in one geographic region — in the Gulf Coast states. In today’s blog, we explore the potential risks of overproduction as producers crank up drilling activity.
As we covered in Part 1, after slumping in 2016, both U.S. crude oil and Lower-48 natural gas production are climbing again. At the current price level near $50/bbl — our Cutback Scenario — the RBN Production Economics and Production Forecasting Models indicate that crude production would grow to 10 MMb/d by 2022. If prices climb to $57/bbl — RBN’s Growth Scenario — production would increase to 11.2 MMb/d by 2022. But if prices increase to $65/bbl — as in our Advance Scenario — crude production could rise to 12.5 MMb/d in five years’ time. Invariably, the incremental crude production will bring with it associated natural gas production.
On the natural gas side, at $3/MMBtu (Growth Scenario), the models show Lower-48 natural gas production ballooning to 92 Bcf/d by 2022. Drilling economics at that price will spur on dry gas basins like the Marcellus/Utica shales and even further jumpstart the long-dormant Haynesville Shale. But there will also be a lot of gas supply from the crude-focused plays — namely the Permian Basin, and Oklahoma’s SCOOP) and STACK plays — that will be competing with the Marcellus/Utica for market share of growing demand, and also the transportation capacity to get the gas there.
In Part 2, we looked at the potential for demand to absorb all that new gas supply. While rising U.S. consumption from the industrial and power generation sectors will help absorb a portion of the incremental gas, by far the biggest demand growth will come from outside the U.S. — from the global LNG market as well as power generation and industrial demand south of the border in Mexico. U.S. LNG export capacity is expected to reach nearly 11 Bcf/d by the end of 2019, from about 3 Bcf/d today. Even at 85% to 90% utilization, that translates to LNG exports catapulting to just under 10 Bcf/d in that timeframe.
Similarly, pipeline delivery capacity to Mexico has increased to about 9.0 Bcf/d in the past couple of years and will increase by another 3.5 Bcf/d by 2022. Exports to Mexico are likely to mosey along, as shippers await more takeaway and gas-fired power generation capacity across the border. But we still expect cross-border flows to rise to as much as 8.0 Bcf/d in 2022.