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Northeast Production Resurgence:

Where's the Beef? Ohio and West Virginia - Part 1

March 15, 2017 | By Charles Nevle

Dry gas production in the Lower 48 contiguous U.S. is averaging 70.5 billion cubic feet per day (Bcf/d) so far this year, compared to 73.3 Bcf/d in the first quarter of 2016. PointLogic’s supply and demand forecast has domestic demand plus LNG and Mexican exports averaging 65.9 Bcf/d for the upcoming summer, an increase of 0.9 Bcf/d over last summer. In addition, winter 2016/2017 is likely to be one of the warmest on record and has lifted end-of-winter storage inventory expectations to around 2.0 trillion cubic feet (Tcf), or about 0.5 Tcf less than the end of  last winter but higher than the five-year average of 1.8 Tcf. All of this is to say that the supply and demand balance for the upcoming summer is significantly tighter than last year.

In order to address the tighter market balance, production needs to increase, or the market faces the prospect of a very low end-of-summer 2017 storage carry-out.

Fortunately, producers have been very active and are increasing drilling activity. Since the oil price collapse in late 2014, the Lower 48 oil and gas rig count bottomed out at 398 in May 2016, and has nearly doubled to the current 765 operating rigs, according to Baker Hughes data. Our latest supply and demand forecast foresees domestic production increasing over 4.5 Bcf/d by the end of 2017, and the Northeast is expected to provide the bulk of this growth. This will represent the largest increase in production over an equivalent time frame. The closest to date was the increase between March and December 2014 of 4.2 Bcf/d.

In this issue of Get the Point we will take a deep dive into Northeast production, which has some of the most active operators in the country, and what we glean from their activity that provides insight into production prospects for the Northeast this year. In this issue, Part 1, we will focus on producers in Ohio and West Virginia; we will follow up soon with Part 2 which will focus on Pennsylvania.

Northeast Region Map

At PointLogic Energy, the Lower 48 is divided up into Regions, States and Producing Areas. The Northeast Region is comprised of 13 producing areas. Of these, four (Utica, Marcellus Wet-WV, Marcellus SW PA-Wet and Marcellus NE PA-Dry) are the primary drivers for the dynamics of production growth in the region.

Northeast Production by Producing Area

Production in the Northeast is fairly concentrated, with the top 11 operators accounting for 71% of regional production.

The table below shows the percent of total production from each of the top operators in the Northeast in addition to their percentage of production in the four major producing areas. For example, Chesapeake accounts for 14% of total Northeast production and 23% of Northeast PA-Dry production.

This table will provide a roadmap to dive into individual producers to understand their prospects for the upcoming year. For instance, to understand the prospects for Utica one would want a solid understanding of Chesapeake, Gulfport and Antero’s current and planned activities for the area.

Operator Market Share in the Northeast

Utica

Utica dry gas production has averaged 3.8 Bcf/d so far this year, down slightly from the peak of 3.9 Bcf/d in September 2016. Nonetheless, the region has grown strongly in a few years. As recently as 2013, the area was averaging less than 0.5 Bcf/d of dry gas production.

The region has achieved this production gain despite inadequate pipeline and midstream infrastructure, but recent projects plus a slew of upcoming plans for new pipelines are helping to diminish this concern. These projects and their implications for regional production are detailed in a previous Get the PointOhio, the Crossroads of the Shale Revolution Part 2.

Baker Hughes places the latest rig count (March 10, 2017) in the Utica at 20 rigs in operation, up from a low of 10 in May 2016. As outlined in Ohio, The Crossroads of the Shale Revolution Part 1, much of the attraction of the Utica for producers in a depressed natural gas liquids (NGLs) price environment has been in the dry gas window in the far eastern portion of the formation, due principally to the sizeable initial productivity (IP) rates attained. In recent months, demand for fractionated NGLs has increased both at home and abroad, giving way to higher NGLs prices and higher net backs for wet-gas streams.

Utica production is fairly concentrated: just three operators, Chesapeake, Gulfport and Antero, make up about two-thirds of the region’s production.

Utica Producing Area Top Operators

Utica - Chesapeake Energy

Just under 20% of all of Chesapeake’s production (based on operated wells) comes from the Utica, a portion that has been consistently growing and is now about double the portion of in 2014 that came from the area. According to a recent investor presentation, the company is planning to expend 15% of its drilling and completion budget, or between $1.9 to $2.5 billion (up from $1.7 billion in 2016), in the play primarily in Jefferson, Carroll and Harrison counties in Ohio. The company plans to employ 2 rigs and drill between 40 and 50 new wells in 2017 while also focusing on bringing its inventory of drilled but uncompleted (DUC) wells online.

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Chesapeake said that 71% of its anticipated gas production in 2017 is hedged at just over $3.00/MMBtu. The company does not give detailed regional guidance on production, noting only that overall production for 2017 is expected to be essentially flat compared to 2016 levels. However, according to its 10K filing with the Securities and Exchange Commission (SEC), natural gas production for Chesapeake has been essentially flat since 2014. This masks, as stated above, an overall change in the regional makeup of Chesapeake production, with its Utica production growing while areas such as Northeast PA-Dry, Eagle Ford and Mid-Con production have been in decline.

Utica - Gulfport Energy

Gulfport Energy, unlike Chesapeake, had been a pure play operator, with virtually all of its production coming from the Utica. This changed with its $1.85 billion acquisition in December of 85,000 net acres in the oily SCOOP play in Oklahoma.

As of February, Gulfport was operating 6 rigs in the Utica, a level which it plans to maintain through the year in order to drill between 67 and 74 net wells. Overall, the company is planning to increase production in Utica by 325 MMcf/d, or 45%, between 2016 and 2017. According to its latest 10K filing, between 2015 and 2016 Gulfport increased production by 196 MMcf/d, almost all of which was in the Utica.

Net Wells Drilled

In order to facilitate the transportation of its increasing production, Gulfport has taken out firm commitments on a number of pipeline projects now under construction. According to its 10K, the following firm transportation contracts are being added in 2017:

  • 54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities expected to begin in 2017, allowing additional access to Gulf Coast delivery points;
  • 100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities expected to begin in 2017, allowing additional access to Midwest delivery points;
  • 150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities expected to begin in 2017, allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and
  • 100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities expected to begin in late 2017, allowing additional access to Gulf Coast delivery points.

Firm Commitments (MMBtu per day)

Utica - Antero Resources

Antero Resources obtains about a fourth of its production from the Utica with the rest coming from the Marcellus in West Virginia. According to its latest investor presentation, the company expects production to increase 0.4 Bcf/d in 2017 to 2.2 Bcf/d, an increase of 22% over 2016 levels, all of which is hedged at an average price of $3.47/MMBtu. According to its latest 10K filing, 30% of its $1.3 billion drilling and completion budget is allocated to Utica positions, with the remainder going to Marcellus. Antero expects to operate 3 rigs in the Utica and 4 in Marcellus in 2017.

According to its 10K, Antero has secured 800,000 MMBtu of capacity on Energy Transfer’s Rover Pipeline project, which the company says will connect its Marcellus and Utica assets to Midwest and Gulf Coast markets via its existing transportation contracts on ANR pipeline.

Marcellus Wet –West Virginia

Marcellus Wet-WV has averaged 3.2 Bcf/d of production so far this year, continuing an upward trend since 2009 that stalled for most of 2015. West Virginia rigs have not shown the kind of rapid growth displayed by its neighboring production states, Pennsylvania and Ohio. As the producer reviews below will show, the region’s growth is dependent on adding new infrastructure.

West Virginia Wet Producing Area Top Operators

West Virginia Wet – Antero Resources

West Virginia Marcellus production is very wet – loaded with NGLs – which places a stronger need on an integrated production strategy. Such a strategy needs to take into account not just access to capacity on interstate pipelines for natural gas, but processing plant capacity, a plan for the NGLs – whether to be fractioned within the region or sent as Y-Grade to another NGLs hub – and, ultimately, a plan for which end markets will receive the NGLs purity products as well as the natural gas. Few producers provide as clear a picture of their integrated natural gas and NGLs strategy as the regional production leader, Antero Resources.

Price Realizations - Largest FT Portfolio in Northeast

Utilizing firm capacity positions on several pipelines, Antero plans a diversified approach to finding a home for its growing gas production. Antero sends gas to the Atlantic Seaboard, the Midwest and to the Gulf Coast for LNG export. It employs a similar diversified plan for NGLs production, relying on regional markets, exports out of Marcus Hook via Mariner East II pipeline and to the Gulf Coast via the ATEX ethane pipeline.

As noted earlier, Antero is an active hedger, with virtually all of its 2017 anticipated gas production hedged. Antero expects NGLs production in 2017 to average 87 Mbbls/d, compared to 73 Mbbls/d in 2016, an increase of nearly 20%, driven by continued exploitation of the wet acreage positions in the Utica and Marcellus. Antero is expecting to benefit from rising NGL prices due to growing exports of NGLs out of the U.S. and the buildout of new ethane feedstock steam crackers both along the Gulf Coast and the Northeast.

West Virginia Wet – EQT

Although Antero dominates West Virginia production, EQT Corp. has a respectable slice, producing 16% of the WV-Wet production. EQT is also a sizeable operator in the producing area to the north across the state line in Pennsylvania – Southwest PA-Wet. EQT picked up significant volumes of firm transport capacity in 2016 on Equitrans Ohio Valley Connector, TETCO’s Gulf Markets Project Phase I, as well as REX’s Zone 3 Capacity Enhancement project.

Based on EQT’s latest investor presentation, the company is expecting natural gas production from the Marcellus, including its acreage in both West Virginia and Pennsylvania, to increase by around 200 MMcf/d, or about 10%.

Although the company is touting capacity on the proposed Mountain Valley Pipeline, the 2.0 Bcf/d pipeline is not planned to come into service until late 2018. 

Bringing it all together

Total Northeast production grew 2.3 Bcf/d between 2015 and 2016, an increase of 12%. While it’s a significant number, it’s the lowest outright growth and growth rate for the region since 2010.

To achieve the production growth necessary to maintain a healthy U.S. gas balance this year, production in the Northeast will need to be at least double the growth seen  last year, a challenge made all the more difficult by the fact that so far this year production has only averaged  3% over average 2016 levels. A deeper look at annual production, volumetric growth and percentage growth can be found in the tables below.

Annual Production, Volumetric Growth and Percentage Growth Tables

In Part 2 of this series, we will round out our discussion of producer guidance with a look into Pennsylvania Marcellus and then take an assessment of the pipeline projects coming online this year that will allow Northeast production to grow.

PointLogic Energy’s Pipeline Project Tracker indicates 3.3 Bcf/d of new pipeline projects are scheduled to come online this summer. In addition the tracker is monitoring 4.6 Bcf/d of projects coming online next winter. These are just the subset of projects that allow gas to move out of the Northeast region and exclude projects that, though vitally important, only help move gas within the Northeast region.

We will then combine the results of the producer guidance with the capacity additions to determine the feasibility of meeting a rapid Northeast production build-up for the remainder of this year, and the implications if the Northeast is not able to meet this goal.

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