Appalachian natural gas producers and marketers are adapting to a new status quo — a world where new pipeline takeaway capacity out of the Northeast is hard to come by and is more or less capped ad infinitum. Without the assurance of pipeline expansions, regional gas producers are no longer drilling with abandon in hopes that the capacity will eventually get built. Instead, producers are practicing restraint by slowing drilling activity, delaying completions and choking back producing wells to manage their inventory during periods of lower demand and prices. In today’s RBN blog, we consider what this new playbook will mean for pricing trends in the supply basin.
Pipeline constraints are nothing new for Appalachian gas producers. Over the past decade, Appalachian natural gas production (blue line in Figure 1) rocketed up to more than 35 Bcf/d, often straining infrastructure and pummeling local price basis — at least until the next tranche of pipeline capacity came online. In recent years, however, Appalachian gas producers have settled into maintenance mode, keeping production relatively flat, even in 2022, despite Russia’s invasion of Ukraine, the resulting energy security crisis, and low storage inventories sending supply basin gas prices rocketing to $9/MMBtu, the highest in over a decade. Among the pressures keeping production flat, producers have battled a number of headwinds since the pandemic, from inflation to shortages of materials and labor, along with hedges entered in late 2020 and 2021 that didn’t allow them to immediately benefit from the lofty gas prices seen last year. However, far and away the biggest constraint for Appalachian producers has been the increasingly grim prospects for new pipeline takeaway capacity.
Figure 1. Northeast Natural Gas Production Receipts vs. Deliveries. Source: Wood Mackenzie flow data
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