Appalachian natural gas producers hold the line on drilling as upstream prices push $3

As natural gas prices in Appalachia push the $3/MMBtu mark, producers there appear to be holding steadfast in their commitment to investors to hold production and drilling at maintenance levels.

In July, cash prices at the basin's benchmark location, Eastern Gas South, have averaged $2.86/MMBtu, to trade at their highest midsummer levels in over five years, S&P Global Platts data shows.

In the forward markets, balance-July prices settled most recently at $2.93/MMBtu. For the subsequent calendar months through November, the Appalachian index is priced slightly lower at an average $2.72, with $3 gas expected to return for the peak winter months of December, January and February.

In Appalachia's recent past, strong gas prices have often been too enticing for the basin's producers, as many have responded by throttling up production. So far this summer, that has yet to happen.

Production and drilling

In July, Appalachia's gas production has fallen from recent highs to average about 32.9 Bcf/d, according to S&P Global Platts Analytics data. The drop, which appears driven by maintenance outages at a handful of regional gas processing plants, lowers output from highs close to 34 Bcf/d in June – still well below record levels recorded during the recent peak-demand months of winter 2020-2021.

With much of the gas-processing capacity expected back online by later this month, production will likely drift higher by August. Still, Appalachia's producers don't appear to be ramping up for growth.

Recent data published by Enverus shows the combined Marcellus and Utica rig count at 45 for the week ended July 14 -- still below pre-pandemic levels in first-quarter 2020 when rigs numbered over 50.

"Investor-owned E&P's are sticking to their capex guns," Jack Weixel, senior director at IHS Markit, said July 19 from the Northeast LDC Gas Forum in Boston. "Whatever plans they laid out at the beginning of 2021, they're sticking with for the large part."

Surprisingly constrained production and drilling in Appalachia -- even in the face of $3 gas prices -- comes as the region's publicly traded producers remain unwavering in their earlier commitments to investors to keep capital spending in check. As regional producers rightsize their balance sheets this year, many are opting to return more value to shareholders, mainly in the form of dividends and share buybacks along with environmental, social and governance, or ESG, investments.

2022 outlook

After essentially flat production in 2021, Weixel said he believed there was good reason to expect renewed momentum in 2022 as publicly owned E&Ps accelerate their investments in capex and drilling, and as associated gas production from the oil-heavy basins recovers.

"We do expect Appalachia and Haynesville to rebound as producers are making their capex budgets for Q1-22," he said, noting that many are likely to exit 2021 with healthier books and more cash flow available for spending on drilling and completions.

Weixel described 2022 as "barnburner year" for production, saying that he anticipated twin recoveries in dry and associated gas production to boost overall output to 96.7 Bcf/d, a rise of roughly 4.4 Bcf/d.

"We're hopeful that we see more robust production and net growth after what has kind of befallen the industry over the past 18 months," he said.

ESG spending

Investor pressure, however, could be a limiting factor for public-facing E&P's looking to resume growth.

Moving into the mid-2020s, many investors have begun calling on producers to embrace more responsible production models with substantial investments in carbon and methane emissions monitoring and reduction, and greater environmental stewardship.

Southwestern Energy, one of Appalachia's largest public E&P's, is among the most recent to announce a deal under which it will receive independent, responsibly sourced gas (RSG) accreditation across all its existing and future unconventional wells. The costly certification and monitoring process through Project Canary began this month and was expected to be complete by early 2022, eventually certifying all of Southwestern's 3 Bcf/d in gross production.

Similar such announcements have come from EQT, the nation's single largest shale gas producer. In June, EQT agreed to join the the Climate and Clean Air Coalition's Oil & Gas Methane Partnership (OGMP 2.0) of the United Nations. Prior to that, EQT announced it own methane-emissions pilot program to certify nine of its Marcellus wells as part of a coalition led by Cheniere Energy.

As numerous other E&P's move forward with RSG certifications and other ESG spending, it's possible that minimal cash flow could remain available for capex budgets in the years to come. Even assuming some funds remain, its also possible that many investors will frown on the growth-oriented production models of the past, instead pressuring publicly traded companies to continue returning additional value to investors.