This post was originally featured in our February 2021 Monthly Montior, which includes articles and analysis for the natural gas, electric, and crude oil markets. To sign up for the Monthly Monitor distribution list, click here. To download past issues, click here.
When talking about the heavyweights of shale gas supply over the past ten years, two names come to mind, the Permian (in western Texas) and Appalachia. Ten years ago, in January 2011, these two plays comprised 7.8 Billion cubic feet per day (Bcf/d), or 28% of U.S. natural gas total production. The U.S. was short supply and was importing significant amounts of gas from Canada and through liquified natural gas (LNG) facilities to help balance the market. Technology, investment, and the impact of regulation/legislation on coal together helped to grow gas production. It has grown so much so, that in December 2020, the Permian, and Appalachia’s Marcellus and Utica, put out a combined 50.1 Bcf/d of gas production, representing 62% of total gas produced in all of the six major shale regions. While this growth was remarkable, one of the puzzle pieces that allowed it to occur was significant buildout of infrastructure.
The timing of the buildout in these two regions has however taken two very different paths to get them to where they are today. The Northeast began the build out years ago with the addition of greenfield projects, Rover and Nexus pipelines, the reversal of Rockies Express, and dozens of other projects that at one point in 2018, significantly exceeded production in the region. However, factors have changed since then, and the region is now approaching yet another potential lack of takeaway capacity. Outflows from the Northeast averaged 14.8 Bcf/d in 2020, with outflows closer to 16 Bcf/d in the last quarter of the year. Total outflow pipeline capacity is estimated to be approximately 18 Bcf/d, leaving little room for additional production growth going forward. In fact, outflows from Appalachia have averaged between 85-90% of capacity for the last four months as Marcellus and Utica production hit peaks of over 34 Bcf/d in December 2020.
The Permian, on the other hand, has added two major market access pipelines, the 2 Bcf/d Gulf Coast Express, which came online in September 2019 and the 2.1 Bcf/d Permian Highway Pipeline, which very recently opened up just last month in January 2021. There is also a third line planned for the region to be completed this year. The forty-two inch, 2.0 Bcf/d Whistler pipeline is under construction and will provide an outlet for Permian gas to the growing Gulf Coast Demand. Once completed, the Permian will have 2-4 Bcf/d of excess gas infrastructure capacity capable of taking gas to multiple markets.
So, with Northeast outflow capacity edging closer to its limits, the expectation should be for basis in Appalachia to become more discounted once again should production continue to rise. Meanwhile, the recent increase in basis differential at Permian & Waha from its NYMEX minus $1-2 depths should remain closer to the Henry hub benchmark, or even a premium for some time to come as markets compete for the gas, and until excess capacity to reach those premium markets is available.