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Blame the northeast for low natural gas prices
1. Blame the Northeast for
Low Natural Gas Prices
Bloomberg Intelligence
Vincent Piazza and Gurpal Dosanjh
Analysts
2. The secular growth in hydrocarbon output from the prolific
Northeast collides with the cyclical, seasonal demand for natural
gas -- yielding a structural imbalance.
While the imbalance will narrow and prices should improve
over time, volume should continue to challenge the pace of
infrastructure build out, continuing to pressure basis differentials
in a market that once was a premium priced region.
4. Prodigious production of natural gas and liquids such as ethane
and propane in the U.S. Northeast will keep pressure on gathering,
processing and transportation infrastructure into 2017, even amid a
steady expansion of capacity.
Prices in the region may be depressed by these bottlenecks, and
other hubs will also be affected as Marcellus and Utica production
displaces natural gas transported to the northeast. Incremental
output flowing to the southeast and midwest will compete with
gas produced in those areas.
6. Natural gas volume growth in the U.S. Northeast is likely to slow
through 2017 as production rises faster than pipeline capacity,
pressuring price differentials across the region. Operators have
sought out new markets to absorb the excess volume, helping to
dilute seasonal supply and demand imbalances and boost prices.
A reversal of typical Northeast flow will hurt basis prices across the
U.S. in the long term. Marcellus and Utica output may surpass 19
billion cubic feet a day in September, about 25% of U.S. volume.
7. Marcellus output growth will slow from historical highs, yet volume
will remain robust and likely continue to outrun pipeline capacity.
Growth in the Utica is also pipeline-constrained. Range, Cabot,
EQT, Exxon Mobil, Chevron, Southwestern and Chesapeake are
significant producers in the region.
10. The price spread between cheap Northeast U.S. natural gas
and more expensive Henry Hub gas will stay wide through at
least 2017, when additional pipeline capacity comes online. The
Northeast, historically a region with premium pricing that imports
gas during high seasonal demand, is now more reliant on its own
lower-cost output. However, limited intermittent takeaway capacity
has reduced prices.
With more takeaway, its gas will find new markets and differentials
may improve while prices elsewhere are pressured.
13. About 30 billion cubic feet a day of pipeline reversal, expansion
and new construction projects may be built through 2018, helping
Northeast U.S. E&Ps transport gas within and out of the region.
About 17 bcf could be sent to the Gulf Coast and South,
competing with legacy gas and suppressing prices. About 6 bcf
may flow east, increasing supply to capacity-short New England
and reducing extreme seasonal pricing in Boston. An additional 5
bcf of capacity will head toward the Midwest, displacing gas from
the Rockies.
14. Expanded pipeline infrastructure should ease bottlenecks in the
Marcellus and Utica plays for producers with natural gas exposure
such as Range Resources, Cabot, EQT, Southwestern, Hess,
Anadarko and Chesapeake Energy. Added capacity should also
help ease wide Northeast pricing differentials.
15. Northeast Natural Gas Pipeline Projects
Year
Flow Direction
* Total assumes reversal, expanded, and new pipeline capacity
Source: EIA, RBN, Bloomberg Intelligence
2015
2016
2017
2018
Total*
East
GC & South
Midwest
Other
Total
Northeast Capacity (Bcf/day)
Northeast Capacity (Bcf/day)
3.56
4.37
13.72
8.3
29.98
3.56
4.37
13.72
8.3
30
17. The Marcellus output glut that’s straining infrastructure is also
depressing prices of natural gas liquids. NGL supply has surged
12-fold in the past five years.
While output growth will be more subdued, demand will lag
behind rising volume, forcing producers to leave ethane,
the largest NGL component, in the gas stream. Projects such
as Mariner East and West will allow ethane exports from the
Northeast U.S. While Enterprise’s propane connector will join East
and West Coast flows, domestic oversupply will remain.
18. Natural gas liquids, also referred to as “wet gas,” may be
extracted from a well’s hydrocarbon stream. Range Resources,
Chesapeake, Gulfport, Chevron, Hess and EQT have exposure to
Northeast plays such as the Marcellus and Utica that have wet gas,
condensate and dry gas windows.
21. Abundant natural gas liquids from the three key U.S. oil plays,
along with stout natural gas volume from the Northeast, will
maintain pressure on regional gas and NGL prices even with
potential export demand. Volume will converge along the Gulf
Coast and Southeast as flows rebalance.
Associated gas from the main oil plays accounts for about 20% of
total domestic output, while Northeast gas makes up 25%. Less
drilling will narrow the supply and demand imbalance, though
expected demand may weaken if exports don’t materialize.
22. Gas and NGL prices will remain depressed in the long term given
the output glut balanced against demand. Export potential may
narrow imbalances as well as less liquids drilling. Exxon Mobil,
Range, Southwestern, Chesapeake, Devon, Anadarko and EOG
Resources are large companies with gas exposure.
24. Operators have successfully tested in the Utica across Ohio,
West Virginia and Pennsylvania with varying levels of success.
Drilling and completion methods in the play, which lies below the
Marcellus, have extended the potential of the Appalachian Basin.
Should Utica operators lower their costs, the basin will be awash
with cheaper natural gas. Similarly, the transition from exploration
to full-scale development and exploitation of the Marcellus
brought prolific output and lower unit costs.
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