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Appalachian Production Constrained by Liquids Infrastructure

A perfect storm of outage-driven constraints continues to disrupt supply in the Marcellus and Utica. The outages resulted in natural gas liquids supply dropping by an unprecedented 55 Mb/d month over month in December. The outages highlight the fragility of liquids infrastructure in Appalachia. In today’s energy market commentary, BTU Analytics will review the outages, discuss producer drilling trends in liquids-rich acreage, and potential implications to supply if repairs and construction on Mariner East I and II continue to be delayed.

As highlighted in Changes on the Horizon with Mariner East 2, NGL pipeline takeaway capacity was expected to increase significantly in 2019 and 2020. As a result, producers in Appalachia began shifting to liquids rich acreage in the second half of 2018. The shift to liquids-rich acreage, combined with new gas pipeline capacity resulted in NGL production increasing from April to October by 97 Mb/d until outages derailed growth in December.

Infrastructure Outages Disrupt Supply

First starting in December, operations at MarkWest’s Harmon Creek and Houston gas processing and fractionation facilities were curtailed due to operational issues. Then, a sinkhole appeared in the right of way for Energy Transfer’s (NYSE: ET) Mariner East I NGL pipeline, exposing the pipeline in Chester County. Mariner East I pipeline has been idled in response, and service will not resume until the Pennsylvania Public Utility Commission concludes an investigation into the cause of the sinkhole and allows flows to resume.

The third event impacting Appalachia supply was an explosion on TETCO. The explosion reduced a critical takeaway option for producers exporting gas from Appalachia, particularly rich gas producers. Unlike other regional pipelines, TETCO offers producers the ability to blend away excess ethane. The blending occurs on TETCO because TETCO grants a waiver on gas quality. The waiver allows shippers to deliver gas with a heat content of 1,200 BTU/Mcf. Typically, a pipeline only accepts gas with a heat content below 1,100 BTU/Mcf. Thus, an outage on TETCO in tandem with a constrained NGL ethane takeaway impacts producers throughout the region. Flows on TETCO are not expected to return to levels seen prior to the explosion until late April or early May. As a result of the outages, Southwest Appalachian natural gas production has flattened in the past few months as highlighted in the chart below.

Operators Drilling Liquids Rich Acreage

One would expect that due to processing constraints and the loss of Mariner East I, drilling activity in Southwest Appalachia would shift away from liquids-rich areas, but for key operators like Range and Antero we haven’t seen this shift yet. By mapping wells drilled against BTU Analytics’ GPM (gallons of NGLs per Mcf of gross gas) content maps from our E&P Positioning Report, we are able to analyze trends in the NGL content for newly drilled wells. This analysis highlights that producers are following through with their plans to shift towards liquids-rich acreage, as shown in the graphic below. The shift towards higher GPM acreage could spell trouble for Southwest Appalachia operators with Mariner East I out of service and Mariner East II’s remaining construction in regulatory limbo. Range Resources and Antero are two of the largest NGL producers in Appalachia and anchor shippers on the two NGL pipelines.

Range’s average GPM increased from 4.75 in December to 7.44 in March. Both Range and Antero’s average GPMs are higher than the regional average. Capacity on the first phase of Mariner East 2 has allowed both Range and Antero to avoid the immediate impacts of the loss of Mariner East I as propane volumes were shifted to the Mariner East II capacity.

Regulatory Uncertainty for Mariner East I & II

In February, the Pennsylvania Department of Environmental Protection issued a notice to Energy Transfer that the PA DEP would halt permit approvals for Energy Transfer pipelines due to non-compliance. The PA DEP has not yet announced that the suspension is lifted. Energy Transfer expects to restart construction early this month on the portions of Mariner East II that do not require new permits.

However, if full completion of Mariner East II is delayed, Appalachia operators could face production constraints limiting growth in NGLs. We have seen in the past four months how sensitive Southwest Appalachian production is to relatively small infrastructure constraints.

To learn more about BTU Analytics’ outlook for natural gas and NGL production, request a sample of our Upstream Outlook.

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