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Throwing a Wrench in the Northeast Machine

Production in the Northeast is an animal all its own. Whereas production trends in other regions with established infrastructure are primarily a function of well economics, in the Northeast, infrastructure constraints also influence the pace of growth. Currently, limited transmission capacity is severely impacting differentials and economics in the region.  The chart below shows the impact of regional differentials on returns in the Marcellus Wet region.  These numbers are based on producer reported numbers, which produce returns that are generally a bit higher than the numbers BTU Analytics calculates based on average regional results.

While producers await new pipeline capacity they are forced to either shut in or accept unfavorable realized prices for molecules sold in the supply area.

Recent producer guidance has divided Northeast producers squarely into two camps: those planning to grow their production in 2015 and those planning to remain flat or decline. With that adjustment in growth outlook, at least one natural gas processor in the Utica and Marcellus has tried to adjust its capital expenditures on new projects to match that of the producers. This presents an interesting dilemma. Although not our base case, trimmed regional production growth coupled with a hot summer subsequently followed by a cold winter has the potential to change natural gas economics for the region, incentivizing a return to faster regional growth.  However, should this situation materialize, the delayed processing projects could become a constraint.

Markwest, the largest natural gas processor in the Northeast, said in their 4Q earnings call: “One of our top priorities is to optimize our growth capital and project completion schedules to closely match our producers’ volume forecast”. Currently, they operate five complexes in the Marcellus, with a capacity of about 3.2 Bcf/d and have plans to expand this capacity through 2016 by 1.8 Bcf/d.

However, of that 1.8 Bcf/d of new capacity, 800 MMcf/d has been delayed by an average of six months and that’s just in the Marcellus. Across the country, Markwest has adjusted startup dates for 10 out of their 18 projects currently under construction, furthering their stated goal to support producers’ long-term development plans. But will this come back to bite both midstream companies and Northeast producers?

BTU Analytics’ forecasted production in the wet region of the Northeast reaches 10.6 Bcf/d by October 2015.

The big question is, is faster growth possible if regional economics improve? Maybe, but if so, processing will have to keep pace. For our complete forecast and more about Northeast production and infrastructure, see our most recent Upstream Outlook.

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Matthew Hoza is a Manager of Energy Analysis for BTU Analytics. Currently he is leading the power team in the development of BTU Analytics’ Power View platform, which provides capacity, generation, and power price outlooks for ISOs and utility areas across the US. Previously, Matthew led the natural gas team that develops and maintains outlooks for natural gas production, demand, pricing, and infrastructure, as well as provided bespoke natural gas market analysis. He holds a M.S. in Finance from the Simon Graduate School of Business at the University of Rochester and B.S. in Physics from Florida State University.

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