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Going Its Own Way, Northeast Production Growth Marches On

February 24, 2016 | By Warren Waite

In this episode of Get the Point, we’ll take a closer look at the recently added pipeline projects that have supported Northeast production growth and reflect why Northeast production is still growing this winter while nearly everywhere else is in decline. Then we’ll detail the specific drivers of growth in select Northeast producing areas. At the end, we’ll comment on Northeast production behavior this upcoming summer and what else is coming down the pike. 

The Northeast region of the contiguous U.S. continues to set itself apart from the rest of the pack in terms of production growth, economics and resiliency during a low price environment. Since the start of the Winter 2015-2016 season this past November, the Northeast has added roughly 5.7 billion cubic feet per day (Bcf/d) worth of pipeline capacity. But this significant development comes with one big caveat: Only about 1.1 Bcf/d of the new capacity actually allows trapped natural gas molecules to escape the Northeast. The rest helps moves gas within the Marcellus and Utica. As expected, new capacity has led to production increases in multiple producing areas within the Northeast. (For an overview of Northeast production and long-term pipeline projects, please see our prior Get the Point analysis, Escape from the Northeast.)

Since November, dry gas production in the lower 48 has increased by 1.5 Bcf/d to reach 74.5 Bcf/d this February. During this time the Northeast gained 1.9 Bcf/d of new production while the rest of the U.S. declined by 0.4 Bcf/d. This was accomplished even though the Appalachian rig count fell 35% since the start of winter to the current 42 operating rigs.

In the days leading up to and directly after Christmas 2015, production took a short-lived nose dive. However, the drop-off occurred in the Northeast for different reasons than those affecting other parts of the nation.

Winter 2015/16 Production

The drop-off in production in non-Northeast lower 48 occurred a few days after Christmas due to a freeze-off event that spread from the Permian Basin in eastern New Mexico and Texas across to Oklahoma. Since that time, production has recovered, but for the most part is still below November levels. Meanwhile, the Northeast marches forward. (For more on production trends, please read Other Side of the Peak.) 

The Northeast has been different. An event that might foreshadow the behavior of marginal production this summer is the nearly 1 Bcf/d drop in Northeast production that occurred Dec. 23-25 due to a collapse in regional prices and demand. That has been almost the only blip in an 8-month steady climb in production.

After a breather in May and June 2015, Northeast production has increased each of the last 8 months. Since Nov. 1, Northeast dry gas production has gained 1.94 Bcf/d. As shown below, the bulk of the growth is occurring in the dry producing areas of Pennsylvania, the Utica in Ohio and the dry portion of West Virginia. 

Northeast Production Growth by Month

Utilizing PointLogic Energy pipeline flow data and our Pipeline Project Tracker, further intelligence about where and what specifically has prompted this latest production surge can be derived.

Generally speaking, producers in the region have publically stated that their production output would increase in the first quarter of 2016. Those production gains are supported by new capacity on interstate pipeline expansions and gathering lines, working off an inventory of drilled but uncompleted wells and the perception of higher spot prices in the winter. By contrast, that last point has been a likely cause for the decline seen in many of the wet plays because the price of oil (main driver for natural gas liquids or NGL prices) has remained around $30 per barrel. There is, however, some price protection for oil as many producers have hedges in place at higher values than what’s been reported in the spot market. 

Let's look more closely at the pipeline projects. Though there were some important pipeline projects that came online in the months before Winter 2015-2016, such as Rockies Express Zone 3 East to West and Texas Eastern Transmission Company’s Uniontown to Gas City Expansion, the focus of this analysis is about those projects that have come online since Nov. 1, 2015. 

Utica

Production growth this winter in the Utica has been centered around three pipelines: Rockies Express (REX), Tennessee Gas and Texas Eastern (TETCO). The November gains were from the Kensington Processing Plant on Tennessee, an uptick from Eureka Hunter into REX and the in-service of Regency’s Utica Ohio River Project. 

Utica Ohio River Project

Utica Ohio River is a 2.1 Bcf/d intrastate system encompassing a 52-mile pipeline connecting gathering areas in Jefferson County, Ohio to Monroe County, Ohio to interconnects on REX and TETCO. The throughput on this pipe is low because the production must compete with downstream takeaway capacity on TETCO and REX. Southbound flows on TETCO’s 30-inch line in Zone 2 have been full and subject to restrictions for quite some time. Additionally, the small amount of available capacity measured at the Chandlerville, Ohio compressor station quickly filled up as new production volumes shifted away from TETCO to REX. 

REX Zone 3 Supply and E2W Flows

Furthermore, TETCO has added connections to Momentum’s Kensington Gas Processing Plant and to Access Midstream. Since the November additions, they have grown to a current average of 74 MMcf/d.

Central PA-Dry

The bulk of the increases measured in Central Pennsylvania-Dry producing area are tied back to the NFGMIDCL/TGP Clermont #2 supply point located in McKean County on Tennessee Gas Pipeline. After averaging 97 MMcf/d in October, the supply point located within pipeline segment 307 has grown 82 MMcf/d to average 180 MMcf/d in February.

Northeast PA-Dry

The Northeast PA-Dry is largest producing area within the Northeast by volume and covers more than 100 different supply points across nine different pipelines. Growth this winter has been concentrated on Empire Pipeline, Tennessee and Transco. 

In November, sample gas production grew 215 MMcf/d on Tennessee Gas Pipeline. This occurred at the same time the 158 MMcf/d Niagara Expansion Project went into service. Exports from New York to Ontario grew by 131 MMcf/d starting Nov. 1 to average a few ticks above 600 MMcf/d, where it has remained since.

In December, Leidy Line production decreases were due to maintenance on Transco related to the completion of the Leidy Southeast Expansion Project that went into to full in-service on Dec. 30. That downturn overshadowed production gains on Millennium Pipeline.  

Northeast PA-Dry Production Adds 0.9

The full in-service of the 525 MMcf/d Leidy Southeast Expansion Project boosted Transco production receipts by 489 MMcf/d in January to average 2.63 Bcf/d. The largest increase was from Anadarko’s Guinter point, which gained 268 MMcf/d that month. Come February, Leidy Line production was up another 120 MMcf/d thanks to Regency’s Chapin supply point. A resurgence in weather-driven demand also gave support to rising production volumes as winter progressed. 

South PA-Dry

The South PA-Dry is second-largest producing area in Pennsylvania. Winter 2015-2016 production gains are focused on two of the five pipelines that span the 27 counties in the producing area.

Consistent monthly production gains on Equitrans and TETCO have added 274 MMcf/d and 265 MMcf/d, respectively, this winter. The increases on Equitrans come from its connection with EQT’s Jupiter Gathering System, which recently underwent an expansion. In December, TETCO added a new supply point (Denex) with Rice Energy in Greene County. This point has ramped up from 200 MMcf/d in December to around 600 MMcf/d in February. Increases of around 100 MMcf/d from Vista Gathering into TETCO and a combined decline of 530 MMcf/d from M3 Midstream and Nisource Midstream Services are also noteworthy.

Key Production Points in South PA-Dry

Southwest PA-Wet

Production in this selection of counties in Pennsylvania is enhanced by its rich NGL and light oil content. With oil prices hovering around $30/bbl, the value of NGLs and ultra-light oil isn’t what it used to be. As expected, production economics here incur a few extra added expenses for processing, transportation and fractionation to get the various products to market. Since natural gas prices are also quite low in this region, much of the production is likely hold by lease production. New production might relate to well completions that were necessary for contractual, operational or financial reasons.

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Sample volumes on Tennessee and Equitrans have declined around 100 MMcf/d this winter, while marginal gains on Columbia Gas (TCO), Equitrans and National Fuel were noted.

West Virginia-Dry

The 585 MMcf/d of winter production increases across the dry portion of West Virginia is an interesting story. If it wasn’t for the nuance of which county a new gathering line (sourced from a processing plant in the wet portion of the state) connected to TCO, then the whole producing area would be in a decline this winter. 

First off, both Dominion (DTI) and Equitrans have each declined around 200 MMcf/d this winter. Dominion’s ETC Northeast TI-360 supply point fell from around 200MMcf/d in October, down to 5 MMcf/d since December. Likewise, the Sedalia supply point on Equitrans declined to zero in January after averaging 102 MMcf/d in November. 

The largest shakeup in the state has been the rollout of the 50-mile Stonewall Gathering System by M3 Midstream (also known as Momentum), which went into service on Dec 1. The system will expand to 1.4 Bcf/d this summer. For now, its anchor tenant is Antero Resources. Deliveries of processed gas on Stonewall to TCO averaged 0.6 Bcf/d in December, 1.02 Bcf/d in January and 1.08 Bcf/d in February.

It is important to note that this new gathering system also connects to Markwest’s Sherwood Gas Processing Complex located in Doddridge County, W. Va. (wet portion of the state). The Sherwood plant directly connects to TCO and DTI. Two counties south of Sherwood, the Stonewall system again connects with TCO in Braxton County. The Braxton-Stonewall Gathering point is closer to the interconnects around Broad Run and not subject to upstream internal constraints on TCO’s “T System”.

Sherwood, WV Production Trends

West Virginia-Wet

As mentioned above, the Sherwood Gas Processing Plant connects to DTI, TCO and Stonewall Gas Gathering. The chart above highlights the shift in output from the plant. Winter-to-date production from points located within the defined counties of the West Virginia-Wet producing area has declined by 400 MMcf/d.

One of Antero Resources' goals is to eliminate direct pricing exposure to Dominion South Point. That happened by Dec. 1, when Stonewall went into service. Antero Resources also shifted volumes away from the TCO connection with Sherwood and moved that (plus incremental production) south on Stonewall Gathering to the Braxton County interconnect with TCO for reasons outlined in the West Virginia-Dry section of this analysis. 

Moreover, Antero Resources is also the anchor shipper on Tennessee Gas Pipeline’s 590 MMcf/d Broad Run Flexibility Project that commenced service on Nov 1. That project moves gas south from Broad Run in Zone 3 to Zone 1 and is directly related to the 582 MMcf/d Broad Run Connector Project that TCO put into service on Dec 1. that flipped the traditional flow between TCO and Tennessee at the Broad Run interconnect. 

The net result has been Antero taking out capacity from the Sherwood Processing Plant, moving that production south on Stonewall Gathering into TCO at Braxton County, which then moves a few miles to Broad Run-Tennessee and finally down Tennessee to Zone 1, where Antero receives an uplift in pricing and, ultimately, better netback value for its gas compared to Dominion South Point and TCO Appalachia. Any incremental volumes that exceed Antero’s capacity to the Gulf Coast can move east on other Antero-owned capacity to the premium DTI-Loudon/Cove Point interconnect or be sold off at the TCO pool.

Broad Run and TGP Southbound Flows

The graph above depicts the reversal of the Broad Run interconnect between TCO and Tennessee in addition to a push of more gas molecules southbound in Tennessee Zone 1. In November, Tennessee delivered 124 MMcf/d to TCO, but since December that has reversed course; now TCO has been delivering roughly 300 MMcf/d to Tennessee. The MLV 548 to Station 860 segment as reported by Tennessee reflects an approximate 200 MMcf/d increase in gas moving down the Zone 1 500 Line from the 500 Line and 800 Line split at Station 860 located in Hickman County, Tenn. 

Price - and the Production Response

At the beginning of this analysis, we referred to a 1 Bcf/d drop-off in Northeast production on Dec. 23-25 (shown in the first graph). It was short lived, but could be a precursor of what can happen when prices plummet and those select producers with the operational flexibility can choke back on production. This phenomenon is also highlighted in the Sherwood Production Trends graph and designated by the red circle. Antero Resources reduced output from Sherwood into Stonewall Gathering and TCO when TCO prices fell below $1.50/MMBtu, but then brought it back up days later. This occurred during a period of below-normal winter gas demand in the Northeast that coincided with reduced throughput capacity on Transco’s Leidy Line. Leidy Line production also dipped. 

Situations like these could occur more frequently this summer if production isn’t reduced in other regions. Though PointLogic is projecting summer demand will be robust, it may not be enough to balance the market. (For more on this see The Winter That Never Was.)

As more and more producers in the Northeast take out long-term pipeline capacity and build a portfolio of assets, it becomes interesting to see how they respond to market forces and thus manage those assets. In years past, producer behavior in the day to day market was difficult to assess as many pipeline contracts held by marketing companies’ blended purchased production with other deals and activity. Going forward, market clarity and transparency will improve. We will be able to draw conclusions about what some producers are doing in the spot market because of the anchor status commitments made on a variety of pipeline projects that are coming to fruition in the Northeast. 

PointLogic Energy’s Pipeline Project Tracker lists more than 13 Bcf/d of capacity within or neighboring the Northeast that can have an effect on Northeast production reaching the marketplace. Though there is about 1.8 Bcf/d of capacity expected to come online in June 2016, the vast majority is slated for November and December of this year. We’ll dive into the highlights of some of those key projects in future episodes of Get the Point.

 

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