BTU Analytics announced a new natural gas market study earlier this week called ‘A Firm Dilemma – Winners and Losers of the Natural Gas Pipeline Reversal Race‘. The crux of the paper details how the low hydrocarbon price environment is forcing the industry into a period where ‘costs dictate growth’.
In the recent past, some Northeast producers lived by a ‘growth at any cost’ mantra, driving Marcellus and Utica production to the limits of pipe capacity which created severe pricing weakness for Appalachian supply price points. As an example, Dominion South and TGP Zone 4 have averaged a flat price at $1.64 per MMBtu and $1.20 per MMBtu for 2015 YTD, respectively. As the chart below shows, total Northeast production has capped out this summer at around 18 Bcf/d as the market awaits new infrastructure expected to come online later this summer and fall.
The signs that producers are beginning to blink on the ‘growth at any cost’ mantra are showing up. In fact yesterday, in its earnings call, Whiting Petroleum announced plans to stay within cashflow despite the fact it may result in production declines in 2016. Although Whiting is a Bakken oil producer, similar announcements are coming, and quite frankly are necessary to re-balance the North American hydrocarbon markets, including the Northeast gas market.
In the paper we analyzed how Northeast producers are positioned to go into this new ‘costs dictate growth’ era by looking at producer pipeline commitments, acreage quality, and hedging programs. This analysis allows us to see which producers are better positioned to enter a market where capital will be more constrained than in the past. As shown below, available low-cost well inventory in the Northeast is not the limit. Thousands of locations exist at sub $2/MMbtu and $3/MMbtu under current spacing assumptions.
One of the biggest changes BTU Analytics has made regarding our view of the Northeast gas market is that we believe the ‘cost dictates growth’ era will be defined by demand and capital constraints; no longer can we assume that every new pipeline expansion will be full. As shown below, for production out of the dry Northeast region, there will be excess pipe capacity in the 2017 and 2018 time frame.
Excess capacity between the Northeast supply area and other demand markets means basis and Henry Hub will need to adjust to these new realities. Spreads that exist today in the market will tighten putting much of the firm transport that producers are committing to under water – hence ‘A Firm Dilemma’. Click here for more information on ‘A Firm Dilemma‘ and our follow on service, the Northeast Gas Quarterly which tracks expected changes in Northeast production, infrastructure, and basis over time.