Permian natural gas volumes continue to grow and the impacts are being felt across the Western US gas market as natural gas prices relative to Henry Hub weaken. April cash prices averaged $0.30 below Henry Hub for Permian and Oklahoma producers while Rockies producers have averaged $0.37 below Henry Hub pricing this month, trading at parity with their Appalachia peers battling for Midwest markets on REX pipeline. Despite the weakness in pricing, producers do not yet appear concerned. Is it time to sound the alarm?
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While producers might have their attention focused elsewhere, even some market analysts don’t know what to make of the situation. One question we’re getting frequently these days is why is Permian production growth not showing up in the data?
To address this question, we need to take a step back. US natural gas markets are perhaps one of the most efficient markets on the planet as producers, consumers, and traders are armed with a host of near real time data on supply and demand fundamentals for US natural gas and power markets. Perhaps the most powerful piece of data being natural gas pipeline nominations.
The best way to understand the use of pipeline nominations can be illustrated through an example –let’s take a second to review production data for Ohio, Pennsylvania, and West Virginia. Analysts have three primary sources of data to assess and model natural gas production: state well-level production data, EIA monthly estimates from the EIA-914, and pipeline nominations. State production data should provide 100% coverage of historical production, but West Virginia only provides updates in July of any given year for the previous year meaning until July 2017, the market cannot definitively answer what production volumes were for West Virginia between January 2016 and December 2016 utilizing data sourced from the state. The EIA-914 provides nearer term updates by surveying producers to estimate total gross production, but due to the time lag in collecting the survey data, estimates come to market nearly two months after the fact. The remaining source of information available to traders, analysts, producers, and consumers are natural gas pipeline nominations. The below chart highlights the extremely strong correlation and sample size of interstate pipeline nomination data available to analyze Marcellus and Utica production daily.
Natural gas pipeline nominations represent approximately 96% of the volume produced from the Marcellus and Utica as very few intrastate pipelines, which are not required to post nominations data by FERC, exist in the region and a limited amount of end users have directly connected to natural gas gathering systems. However, new interconnects are coming such as Cabot’s (NYSE: COG) direct deliveries to several power plants in Northeast PA, which will begin to reduce the sample’s correlation with total production over time.
Appalachia highlights how natural gas pipeline nominations can provide great insights into production, but in Texas, where intrastate pipelines reign supreme, pipeline nominations can lead to inaccurate or misleading conclusions about production, demand, or export trends in the region.
In Texas, nomination data provides, on average, visibility into about 25% of total production with some basins like the Barnett having nearly zero daily insight as producers deliver nearly 100% of the volumes onto the intrastate pipeline network. As the chart below highlights, Permian visibility is better than the Barnett with pipeline receipts from gathering systems and processing plants totals nearly 3.3 Bcf/d in April compared to a BTU Analytics estimated 7.5 Bcf/d of gross gas production. On average since 2012, the Permian sample has accounted for about 40% of gross natural gas volumes. Accounting for estimated processing and treating losses in the region, the percentage visible jumps to about 50% of the estimated residue or dry natural volumes available for sale into the interstate and intrastate markets.
All else equal, 1 Mcf of growth should represent about 0.5 Mcf of growth in the pipeline sample. However, gas moving on the interstate pipeline grid exiting the Permian is hitting a combination of physical constraints and demand constraints. It begs the question, is the next molecule of production growth really hitting the interstate pipeline grid? The weakening in Waha basis and the correlation to BTU Analytics’ estimates of daily eastbound volumes on the intrastate pipelines would certainly indicate that congestion is quickly increasing.
With Eastbound flows estimated at nearly 90% of operational capacity and production set to increase by nearly 2.0 Bcf/d by year-end 2018 , could shut-ins be in store for Permian and other West producers to balance production with seasonal demand and pipeline capacity? (Note this data and analysis only available to Permian Package subscribers)
While pipeline nominations can provide great daily insight into production, demand, and storage fundamentals, one must remember the data is not perfect nor complete for many parts of the country. Many analysts reliant on historical relationships between pipeline flow data and other sources of information (EIA, state production data, ISO power generation, etc.) may have forgotten this fact.