One Step Closer – Market Impact Of 2016 Northeast Natural Gas Production Trends

May 21st, 2016 | By admin | Category: Gas Pipeline Expansion NEWS

NatGas Consulting

Wednesday, 05/18/2016Published by: Sheetal Nasta

The Northeast has been the biggest driver of U.S. natural gas production growth in recent years, and while rig counts have come down, output from the Marcellus and Utica has remained resilient and helped offset declines in other supply regions. In the process, the Northeast has reinvented itself, shifting from a gas-thirsty consuming region to one of the biggest gas net producing regions in the U.S. But pipeline flow data indicates that Northeast production peaked in February and growth has flattened since then. Is the data signaling a long-term peak or is this a temporary lull? Today, we continue our analysis of the Northeast supply/demand balance with a closer look at recent production trends.

This is Part 2 in our “One Step Closer” series looking at the Northeast gas supply/demand balance. In Part 1, we looked at the overall winter 2015-16 balance (regional production versus demand). As we noted, the Northeast became a net supply region on an annualized basis for the first time in 2015. The region had been marching toward this tipping point ever since drilling in the Marcellus, and later the Utica, started ramping up, with regional production climbing 3-5 Bcf/d each year the last few years. Demand was also on the rise as lower prices led to higher utilization of gas-fired power generation capacity, but not nearly at the pace of production. Initially, production outpaced demand just periodically, then on a monthly average basis for a few months of the year when demand typically is low, and eventually for all 7 months of the gas “summer” season, April through October. But the peak winter demand months continued to carry a supply deficit – until this past winter. In winter 2015-16 (November 2015-March 2016), we saw production exceed demand on a seasonal average basis for the full winter for the first time ever. Northeast production this past winter averaged about 21 Bcf/d, while regional demand averaged about 19 Bcf/d, leaving the regional balance over 2.0 Bcf/d supply long, compared to a more than 4.0-Bcf/d supply deficit in winter 2014-15, which was a somewhat colder-than-normal winter. The difference this year was that it wasn’t all due just to production growth. In fact, this winter, the market had the double-whammy of low demand (due to an exceptionally warm winter) and higher production. Winter over winter, Northeast production growth was more modest than it had in previous winters – about 2.7 Bcf/d –  while demand was down nearly 4.0 Bcf/d from the winter of 2014-15.

Today we focus on recent production trends. To do this, we used Genscape’s NatGas Analyst tool to query daily pipeline flow data, specifically for production receipt meters located in the producing Northeast states. Figure 1 shows the resulting daily volumes in 2016 to date (orange line) versus 2015 (blue line).   Note that we reviewed the quirks and assumptions of natural gas flow data analysis late last year in our Sooner or Later blog series.

As the blue line shows, Northeast production started 2015 averaging about 18.5 Bcf/d (in January 2015) and climbed to just under 20 Bcf/d by the start of the 2015-16 gas winter season in November. Northeast production in recent years has been paced by the availability of takeaway capacity, and that continued to be the case in the second half of 2015 and early 2016. Over a dozen expansion projects came online in 2015, but the majority of the interregional takeaway capacity came online in the second half of the year, including 1.2 Bcf/d on Tallgrass’ Rockies Express (REX) Pipeline Zone 3 East-to-West. There were also two projects that expanded capacity on Spectra’s Texas Eastern Transmission Co. (TETCO) pipeline: the Union-to-Gas City (U2GC) project, which added about 0.4 Bcf/d of takeaway capacity from the Northeast to the Southeast/Gulf region by August 2015, and the Ohio Pipeline Energy Network (OPEN) project, which added another 0.55 Bcf/d by November 2015. A smaller project, the Tennessee Gas Pipeline’s (TGP) Niagara Expansion project, also added nearly 0.2 Bcf/d of capacity to export gas from New York to Canada by October 2015. Initially, not all of the new REX capacity could be utilized as additional receipt capacity was needed to bring gas onto the pipe, and the U2GC project also took about a month to reach full service. But between July and December 2015, Northeast production climbed about 2.0 Bcf/d to 20.2 Bcf/d. That was in spite of some temporary operational disruptions in late December due to a short-lived but severe winter storm.

In January 2016, flow data shows production levels jumped nearly another 1.0 Bcf/d from December (2015). That increase coincided with a new production receipt point on REX in mid-January – the Ohio River System/REX Bearwallow tie-in in Monroe County, OH – allowing production to rise another 0.2 Bcf/d or so. But the bigger factor was the long-delayed arrival of winter weather, which boosted local demand, lifted prices and allowed for more gas out of the ground. That trend continued in February 2016, when production averaged record 22.2 Bcf/d, up more than 1.0 Bcf/d from January (2016) and up more than 2.0 Bcf/d from the start of the gas “winter” season in November (2015). These gains occurred despite supply prices (i.e. Dominion South) remaining below $2.00/MMBtu in the cash market through this period. Since winter weather dissipated after February, however, production levels also have receded. In March, production averaged 21.7 Bcf/d, fell nearly another 0.2 Bcf/d in April to about 21.5 Bcf/d, and in May to date is averaging just above that at 21.6 Bcf/d–down about 0.5 Bcf/d from February’s record though still above January 2016 and fall 2015 levels.

Several factors have contributed to the declines since February, including short-term events as well as trends that suggest long-term implications. In terms of short-term events, REX experienced a brief outage following a mechanical issue at one of its receipt meters in Ohio in early March. Ohio receipts fell nearly 0.9 Bcf/d from the prior 7-day average of 3.6 Bcf/d to less than 2.8 Bcf/d on March 2, before returning to pre-outage levels a few days later on March 5. Total Northeast production during that period fell about 0.8 Bcf/d, indicating that just about all of the affected production could not be rerouted and was simply shut in. This scenario will recur in mid-July when REX plans to complete tie-in work related to its new Zone 3 Capacity Enhancement expansion project (see Go West, Young Molecule). The work is expected to limit westbound capacity from Ohio and likely shut in a large portion of the 1.7 Bcf/d of production that currently is received there.

More recently, on April 29, 2016, the TETCO’s Penn-Jersey line in southern Pennsylvania (Marcellus Shale area) experienced a rupture and explosion, severing flows through its Delmont compressor station in Westmoreland County, PA. The line flows primarily Marcellus production receipts eastbound to the New Jersey market area. (Unlike REX, this is takeaway capacity that serves intraregional demand market areas.) One day prior to the explosion, Genscape’s pipeline flow data showed 1.3 Bcf/d flowing through the compressor. While the majority of that was rerouted, the outage shut in 200-300 MMcf/d of Marcellus production in the area for an extended period.

Another factor affecting production in recent months is midstream maintenance, which is typically reserved for low-demand periods during the summer and “shoulder” months and often requires reducing capacity on pipelines and otherwise restricting flows. With an abbreviated winter this year, it’s possible that maintenance season got an early start and contributed to production declines starting in March or early April.

And finally, one of the major factors affecting Northeast production is simply demand. February 2016’s record production volume demonstrates that close to another 1.0 Bcf/d of production was at producers’ fingertips when wintry weather arrived and regional demand ramped up. But more recent declines indicate the market was unable to sustain production at that level when Northeast demand became weak. Barring incremental takeaway capacity, this suggests that producers remain demand-constrained in the region and that it likely would take a combination of high local demand and all of the available takeaway capacity out of the region to see production levels return to the record-high levels seen in February.

We will come back to the topic of long-term infrastructure changes in a future blog series, but for now there is little new takeaway capacity due in service until late 2016. Thus, recent trends can tell us something about how production could behave this summer. For instance, since we know the region is still capacity-constrained, we are unlikely to see much growth in production volumes through at least November (2016), when new takeaway capacity is expected online. While production volumes will remain higher than last year through the gas summer months due to earlier growth, they are likely to remain relatively flat to current levels unless demand comes in exceptionally strong. We can also expect takeaway capacity outages like the one on REX, and expect regional demand fluctuations to continue to cause some volatility and potential downside risk to production volumes this summer. These factors combined could lead to some degree of further tightening on the supply side of the regional balance relative to earlier in the year.

The next blog in this series will focus on the demand side of the balance as well as the impact of the balance on regional storage and imports/exports from the region.

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