Still they ride

Here's a look at the same data by producing sub-regions, shown clockwise from the top left in Figure 2: northeastern Pennsylvania (NE PA), southwestern Pennsylvania (SW PA), West Virginia (WV) and Ohio (OH). We split Pennsylvania into two areas defined by counties because those two producing regions are so radically different, with NE PA producing primarily dry gas and having greater takeaway constraints, and SW PA being primarily wet gas with some dry and only somewhat constrained. The graphs show the 2014 (green line), 2015 (blue line) and 2016 (black line) daily production volumes, as well as the December 2015 average (red line). Also note the volume scale on the left axis varies by region.

NE PA production (Figure 2 - top left graph) continues to be the biggest producing area in the region, but production from this region peaked in late 2014 (spike in the green line) at just above 8.0 Bcf/d and has struggled since then. In late 2014, production rose as takeaway expansions came online and exceptionally cold weather propelled demand and prices higher in the region. (You can see similar upticks in each of the other regions around this time.) But volumes retreated again as weather normalized by late December 2014/early January 2015, and dived further by April 2015 once winter demand subsided altogether. For full 2015, regional production averaged 7.0 Bcf/d, down 0.3 Bcf/d from 2014, and has averaged barely higher than that—about 7.2 Bcf/d—in 2016 to date, which is just 0.2 Bcf/d higher than the December 2015 average.

SW PA (Figure 2 - top right graph) has been somewhat more resilient, climbing through 2014 and 2015, but this area too has flattened out in 2016. The region peaked in late 2015 at just over 5.0 Bcf/d and averaged 4.4 Bcf/d in 2015 (1.4 Bcf/d higher than 2014). This year to date, it's averaged 5.4 Bcf/d, 1.0 Bcf/d higher year on year but again barely (just 0.3 Bcf/d) higher than where it ended 2015.

WV (Figure 2 - bottom left graph) also grew somewhat in 2015, up about 0.5 Bcf/d to an average 3.5 Bcf/d. Regional production lingered more or less near 2015 levels untila major disruption in mid-2016 (deep valley in the black line) when severe flooding shut-in receipts, particularly onto Columbia Gas Transmission. Volumes recovered in short order and reached annual highs in late summer 2016. But growth has slowed since then and receipts are about 0.1 Bcf/d higher year on year through October, bringing the year-to-date average to 3.7 Bcf/d.

OH (Figure 2 - bottom right graph), which primarily represents Utica Shale production, has been the biggest driver of Appalachia production growth in the past couple of years, climbing from almost nothing in 2013 to 3.5 Bcf/d this year to date, nearly level with West Virginia. That is up 1.3 Bcf/d year on year for the period, but up just 0.2 Bcf/d from the December 2015 average. Volumes were in part thwarted by capacity disruptions on Rockies Express Pipeline (REX), particularly in July (more on that below).

Several factors created additional headwinds for producers this year that exacerbated the slowdown compared to 2015. For one, producers continued to lay down rigs, particularly in Pennsylvania. Rig counts started 2016 near 50 but were down in the mid-30s by May and lingered there through much of the summer. For another, even if rig counts hadn't fallen, there was the ongoing issue of constrained pipeline takeaway capacity from the producing regions. Up until now, production growth has been paced by takeaway capacity additions. In recent years, there's been a now familiar pattern—takeaway constraints followed by incremental takeaway capacity out of the Northeast supply regions, which then are immediately followed by a surge in Marcellus/Utica production and the need for more takeaway capacity, and so on. The impact of constraints on production worsened after production surpassed demand through 2015 and the region became progressively more dependent on takeaway capacity out of the region, including through the exceptionally mild winter of 2015-16. Between February and October (2016), not only was there little expansion capacity added, but existing takeaway capacity experienced some significant disruptions, which only contributed to the supply volatility and declines. In early March, REX experienced a brief outage following a mechanical issue at one of its receipt meters in Ohio, reducing overall Northeast production by 0.8 Bcf/d for a few days. This scenario recurred on a larger scale in mid-July when REX began a planned maintenance to complete tie-in work related to its Zone 3 Capacity Enhancement expansion project. The week-long outage again reduced production by more than 1.0 Bcf/d. And in between those two events was a surprise outage on Texas Eastern Transmission's (TETCO) Penn-Jersey line in late April, when a rupture and explosion severed flows through the line's Delmont compressor station in Westmoreland County, PA. The line flows primarily Marcellus production receipts eastbound to the New Jersey market area. While the majority of flows on the line were rerouted, the outage shut in 200-300 MMcf/d of Marcellus production in the area for an extended period. And, as mentioned previously, flooding in West Virginia temporarily curtailed production from that state as well in late June/early July.

More recently in late September/early October, the region experienced another kind of constraint— nearly full storage. For a while there in late summer, it looked as if gas market economics had wiped out the year-on-year surplus in storage—low gas prices had incentivized the market to burn record amounts of gas for power generation, the year-on-year storage surplus had come down from about 1 trillion cubic feet (Tcf), and it looked like the US storage inventory was going to narrowly escape last year's record high levels. But Mother Nature had something else in mind. Weather forecasts for above-normal temperatures, which had supported demand in the hotter months, lingered well into October, when some demand for heating normally kicks in, particularly in the northernmost states. That hit the Northeast supply regions especially hard. Inventories at regional storage facilities marched toward capacity limits, backing up supply in the pipelines and ultimately back to the wellhead. After hitting an average 22 Bcf/d in August, Northeast production by October 2 had dropped to a 2016 low near 20 Bcf/d. Despite falling production Northeast natural gas spot prices for next-day delivery traded as low as $0.10/MMBtu around that time, according to Natural Gas Intelligence's daily cash price index. A lot of the recent production declines in the Marcellus/Utica have been related to short-term capacity issues—storage and pipeline—exacerbated by mild weather. The resulting supply congestion may continue to some extent in the near-term, especially if mild weather persists, given that this is also around when scheduled, mandatory withdrawals (i.e. ratchets) kick in for some big Northeast storage facilities for the sake of operational integrity, regardless of demand. But many of the capacity issues are likely to fade when winter hits and as more pipeline-expansion projects come online.

Already since that low point in October, daily flows show Northeast production volumes have bounced back somewhat to near 22 Bcf/d as of early November as some heating demand has shown up. (Heating degree days, or HDDs, in late October climbed to above 100 in the Northeast region for the first time since mid-April—above-normal for this time of year.) Moreover, there are other signs as well that Northeast producers potentially are gearing up for another winter production surge. Rig counts in the three growth states (Pennsylvania, Ohio and West Virginia) have creeped back up since August and are above 50 combined as of the last two weeks, according to the latest Baker Hughes rig count data, which is in line with January 2016 counts. There are also several expansion projects that have come online this fall or that are planned to begin service in the first half of winter, facilitating increased production volumes in the process. Phase 1 of TETCO's Gulf Market's Expansion began service in early October, increasing southbound takeaway from Ohio and Pennsylvania by about 0.4 Bcf/d. Around the same time, EQT Midstream Partners LP (EQM) ramped up its new Ohio Valley Connector (OVC) pipeline, which is designed to move as much as 0.85 Bcf/d of production from northwestern West Virginia to interconnect with REX and TETCO in Ohio (0.65 Bcf/d of that is subscribed on a firm transportation basis). Of course, this incremental capacity came on just as tepid demand and high storage levels were beating back production. And for now, any OVC flows onto REX would have to come at the expense of receipts from other meters, as the REX mainline's westbound capacity has been running full. But in December, REX is expected to bump up its westbound capacity by another 0.8 Bcf/d, on top of the existing 1.8 Bcf/d. In addition, Dominion Transmission Inc. (DTI) received the green light to place its Clarington and Lebanon West II projects into service as of November 1, which would move an incremental 250 MMcf/d from West Virginia and 130 MMcf/d from Pennsylvania, respectively, to interconnects in Monroe County, OH. Also in late October, the Federal Energy Regulatory Commission (FERC) approved the November 1 (2016) start-up of most of Spectra Energy's 342-MMcf/d Algonquin Incremental Market (AIM) project—the largest expansion of New England pipeline capacity in several years. The balance of the project is expected to go online sometime in December.

These expansions, along with the other market dynamics, indicate uncertainty or potential volatility in the Northeast market in the coming months. While the expansions and onset of winter demand are likely to incentivize production, weather remains a wild card (as always). Even a normal winter would be bullish compared to last year's exceptionally mild winter, prompting producers to turn on the spigot. On the other hand, prolonged mild weather and delayed heating demand could increase supply congestion and suppress production. We'll be watching flow data closely to see how these opposing factors play out this winter.

ABOUT THE AUTHOR

Sheetal Nasta is a fundamental energy analyst, writer and consultant with over 10 years of experience observing and analyzing natural gas markets. She was previously Manager of Energy Analysis for North American Natural Gas at Bentek Energy for five years, where she developed and shepherded new market analysis and content for more than a half-dozen white papers, Bentek's Market Call forecast reports, the Regional Observer suite of products and other reports. Prior to Bentek, she was Senior Editor at Platts on the natural gas desk, where she produced the daily Platts/ICE Forward Curve and specialized in telling data-driven investigative and analytical stories explaining the impacts of infrastructure expansions, supply and demand fundamentals and other factors in the natural gas spot and forward markets.