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Northeast Production Resurgence – Where’s the Beef? – Pennsylvania – Part II

April 12, 2017 | By Charles Nevle

Last month, Part I of this series noted that U.S. lower 48 natural gas production has been in decline while demand this summer is poised to increase. In order to maintain a market balance natural gas production needs to break out of its stupor and grow significantly by the end of this year. Much of the hopes for this growth are on the Northeast region which is set for a substantial build out of pipeline infrastructure throughout this year.

As described in Part I, four of the seventeen PointLogic Energy (PLE) producing areas dominate Northeast production: Utica, Marcellus Wet-WV, Marcellus SW PA-Wet and Marcellus NE PA-Dry. Together, these four producing areas comprise nearly 90% of Northeast regional production. Part I addressed the Utica and Marcellus Wet-WV while this issue of Get the Point will address the two dominant producing areas in Pennsylvania.

Northeast Region

As pointed out in Part I of this series, production in the Northeast is fairly concentrated, with the top 11 operators accounting for 71% of regional production. 

Operator Market Share in the Northeast

The above table 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 example, to understand the prospects for Utica a solid understanding of Chesapeake’s, Gulfport’s and Antero’s current and planned activities for the area is necessary.

Marcellus SW Pennsylvania-Wet

Dry production from Marcellus SW PA-Wet has averaged 4.9 billion cubic feet per day (Bcf/d) so far this year, down slightly from its peak of 5.1 Bcf/d in June 2016. Within the footprint of this producing area are ten counties. Two of these counties make up over 80% of the area’s production: Washington and Greene, in the far southwestern portion of the state.

Marcellus SW PA-Wet Wellhead Prodcution by County

Production in Marcellus SW PA-Wet  is dominated by EQT and Range Resources and to a lesser extent by Rice Energy and Consol Energy.

Southwest PA West Producing Area Top Operators

Marcellus SW PA Wet – EQT

Over two thirds of EQT’s production in SW PA-Wet is derived from Greene County. EQT is a very regionally focused producer and is also a sizeable operator in the producing area to the south across the state line in West Virginia – Wet. For EQT as a whole, production from these two producing areas comprises about 90% of the company’s overall production portfolio.

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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. The only 2017 project the company highlights that increases takeaway capacity from the region is Energy Transfer’s Rover pipeline which is projected to have an in-service date in Q3 2017 to Defiance, Ohio with a capacity of 150 MMcf/d. After 2017, the next capacity commitment EQT is touting is 1.3 Bcf/d of the 2.0 Bcf/d capacity on the proposed Mountain Valley Pipeline, which is planned for a late 2018 in-service. 

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%. In essence, the producer is touting 2017 as a 10% to 12% growth year with significant growth (15% to 20% per year) for 2018 and beyond as Rover and Mountain Valley pipelines come into service.

Marcellus SW PA Wet – Range Resources

While the majority of EQT’s SW PA-Wet production comes from Greene County, about 90% of Range Resources production is situated in Washington County. Range Resources is also close to a pure play operator, with over 75% of their production coming from SW PA-Wet and about 20% from NE PA-Dry. However, they have significant acreage in north Louisiana which they are planning on developing this year.

Per its latest investor presentation, Range is expecting a significant increase in both capital spending and production with production increasing from about 1.5 Bcf/d in 2016 to 2.1 Bcf/d by 2017.

Capital Efficient Growth Continues

Range Resources has 400 MMcf/d of capacity on Rover pipeline which they expect to come into service in Q3 this year. In addition, Range has 200 MMcf/d of capacity on the Adair Southwest pipeline project, 300 MMcf/d on Leach Xpress and 400 MMcf/d on the related Rayne Xpress project. Interestingly, Range has indicated that they do not expect any impact to their robust 2017 and 2018 growth expectations should the Rover pipeline project be delayed. (See footnote 2 in the above graphic). To handle liquids production, Range has secured capacity on Mariner East, Atex and Mariner West liquids pipelines. Range also states that over 75% of their production for 2017 is hedged at an average price of $3.22/MMbtu.

Marcellus NE Pennsylvania-Dry

The Northeast PA-Dry region is, by far, the largest contributor to production in the Northeast. Average 2016 dry production averaged 8.0 Bcf/d. It is, in fact, by far the largest of all 92 of PointLogic’s producing areas.

The problem with production in this region is that it has been essentially flat since 2014 due to transportation constraints. The area is in desperate need of new pipeline infrastructure leaving the area to help gas production grow. Growth in this corner of Pennsylvania is also, of course, in competition for capital with its more liquids rich neighbors to the west and south. Within the producing area, Susquehanna County is the largest source with over 3 Bcf/d of wellhead production making it the county with the largest gas production in the Lower 48. (Interestingly, number two on this list is Sublette County, Wyoming located in the Green River-WY producing area). 

Northeast PA-Dry Wellhead Production by County

Production within Northeast PA-Dry is dominated by Chesapeake Energy and Cabot Oil & Gas and to a lesser extent by Southwestern Energy and Chief Oil & Gas.

Northeast PA-Dry Producing Area Top Quarters

NE PA Dry – Chesapeake

Chesapeake is a highly diversified producer with significant production not only in the Northeast, but also in Texas, Louisiana and Oklahoma. Nonetheless, about one-third of their operated production comes from NE PA Dry. A very telling slide from their latest investor presentation makes clear their near term intentions for this piece of their portfolio.

2017 Capital Allocation

Only 5% of their 2017 drilling and completion budget is targeted at NE PA Dry and only one of the 18 rigs the company plans to deploy this year is focused on the region. Clearly, their intent is to become more oil focused and the portion of their budget they will deployed to natural gas will be directed primarily at the Haynesville and Utica. From their Q4 investor presentation it appears they are looking to keep NE PA-Dry production stable until better transportation options, and thus better pricing, arrives. Highlighting the fact that 92% of their acreage in the region is held by production, they plan to complete 40 to 45 drilled but uncompleted wells (DUC’s) this year and drill 10 to 15 new wells.

NE PA Dry – Cabot

In contrast to Chesapeake, Cabot is virtually a pure play operator with over 95% of their production coming from NE PA Dry, and nearly all of that from Susquehanna County. That said, they do hold a significant acreage position in the Eagle Ford which they plan on developing this year, with about a third of their drilling and completion budget targeted at the Lone Star state play while the remainder is focused on their Marcellus holdings. While company guidance is targeting 5% to 10% growth in production for 2017 it does not appear much of this is coming from Marcellus. Their Eagle Ford growth is aimed at helping tilt their production profile to oil. A telling slide from their investor presentation highlights projects coming online in 2018, such as Atlantic Sunrise and Constitution pipelines, but shows nothing for 2017.

2018 - An Inflection Year for Cabot

Bringing It Together

Chesapeake and Cabot’s outlook for 2017 for NE PA Dry paints a sobering picture of growth opportunities for the area. This is not surprising given that we’ve seen this same environment in the region for three years and no significant new projects are on the horizon until mid-2018.

In October of last year Williams Company announced that the 1.7 Bcf/d Atlantic Sunrise project is delayed until 2018. The other big project that will help this region grow is Williams’ 0.65 Bcf/d Constitution pipeline, but it is not slated to be in-service until 2018 or possibly 2019 (this assumes Constitution’s legal challenges are resolved and it receives a water quality certificate from New York).

This means the heavy lifting of growth for the Northeast this year will have to be borne by the other three major producing areas: Utica; West Virginia-Wet and Southwest Pennsylvania-Wet.

In contrast to previous year’s, Northeast production (other than in NE PA  Dry) following the in-service of select pipeline projects does not seem to be capacity constrained in certain areas. This is likely the result of the depressed production environment that has arisen in the wake of the massive reduction in drilling activity after the oil and gas commodity price collapse. Certainly, rigs have increased dramatically in the Northeast since that time, but the ‘treadmill’ of well decline curves versus new drilling is favoring replacement production, not growth. It is taking time, but the tide will soon turn and production in these sectors will show growth. Production can grow in this region perhaps 0.5 Bcf/d to 1.0 Bcf/d without new infrastructure as the market takes advantage of underutilized capacity throughout the system. In addition, growing gas-fired power generation demand in constrained areas of the Northeast could help absorb some increase in production.

Nonetheless, at some point this summer the market will need new pipeline infrastructure to continue to grow production. Point Logic’s Project Tracker database is tracking 3.5 Bcf/d of capacity coming on line this year that moves gas out of the Northeast and thus allows production to grow, the vast majority of which will be in-service in Q4. This figure does not include the 2.2 Bcf/d Rover Phase I project that is slated for in-service in Q3 to Defiance, Ohio and thus does not get out of the Northeast. However, via interconnects with ANR and Panhandle Eastern in Defiance some of this capacity should be able to move out of the region. In Part I of this series we highlighted Antero Resources’ plan to use capacity on Rover to move gas to existing contract capacity on ANR and on to Midwest and Gulf Coast markets. Antero holds 800 MMcf/d of capacity on ANR.

Stepping back and reviewing producer indications for the coming year we can get a back of the envelope idea of the kind of production growth implied by these announcements. Below is a tally of the implied 2017 production growth for each of the producers we reviewed in Parts I and II of this series along with an average by producing area. We then applied this average growth to the full 2016 average production for the respective producing area.

Northeast production by Year

Back of the Envelope Northeast Production Growth Projection 2017

Clearly this is an unscientific, very broad, very big picture way to look at what could happen with Northeast production this year, though it is in fact in line with our expectations. But to put it in perspective, it would be the lowest growth in the region since 2010.

In Part I we started out by describing the nature of this current tightening market caused by lackluster production and increasing demand from LNG and Mexican exports. We also pointed out the necessity for production to grow this year to prevent the prospect of a very low end-of-summer 2017 storage carry out. If Northeast producers are able to achieve 2017 production growth in the neighborhood of 2.3 to 2.5 Bcf/d over 2016 levels this should be sufficient, given the relatively high March 2017 carry out storage inventory level.

Now the task becomes to start this growth. We will continue to monitor Northeast production levels very closely over this summer and you can get all the data and intelligence from our Production Module and new Northeast Gas Fundamentals report series debuting next month.

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