This fall, as Appalachian gas demand has waned and storage has approached injection limits, Appalachian outright natural gas prices have reached new lows. As a result of the oil and gas correction, a drawdown of Marcellus and Utica DUCs in combination with lower rig activity, Appalachian production has trailed off as prices have weakened as shown below going from over 20 Bcf/d in early September to close to 18 Bcf/d over the weekend of October 1, 2016.
The question is – what is the impact that winter demand within constrained areas of the Marcellus & Utica can have on Appalachian production? First we looked at well level production data to find all counties in Pennsylvania, West Virginia and Ohio that had production of over 50 MMcf/d of which there are 38 counties as shown below.
So what does demand look like in these gas producing counties? Pennsylvania has the most counties and the most demand distributed across res/com, industrial end-users and power plants as shown below. It helps having a major city like Pittsburgh and power plants to drive these numbers higher as compared to WV and OH which only have rural res/com demand. It is worth noting demand growth within Appalachia shows a level shift higher during summers from 0.5 Bcf/d in summer 2012 to over 1 Bcf/d levels in summer 2016 (also note in PA a summer peak demand shape exists driven by strong power burn in the 20 PA counties selected for this blog). Back to the tally on Marcellus and Utica production, peak winter demand for these counties exceeds 3 Bcf/d from a summer base of 1 Bcf/d, putting an incremental 2 Bcf/d in play.
Pipeline flow sample peak Appalachian production was 20.6 Bcf/d on February 12, 2016. Therefore, Appalachian production at 18.5 Bcf/d today could grow 2.1 Bcf/d with stronger pricing to get back to the previous peak level of 20.6 Bcf/d (inclusive of the demand shown above). In addition, pipeline expansions on Rockies Express (REX) and Dominion this fall will result in approximately 1 Bcf/d of incremental takeaway capacity getting us to 3 Bcf/d of incremental production from current levels reaching 21.6 Bcf/d this winter. Further new power plant development within these counties could allow production to grow further regardless of pipeline expansions as highlighted in a recent blog.
To get more information on BTU Analytics Appalachian gas market coverage request a sample of the Northeast Gas Quarterly.