North American gas midstream sector prepares for consequential earnings season

Houston — The start of first-quarter earnings reporting season will give the market a glimpse into how extensive has been the impact of the coronavirus pandemic on operators of pipelines, processing facilities, gathering systems and liquefaction terminals.

A collapse in global crude prices due to severely weakened demand amid widespread stay-at-home orders may result in associated gas production slowing and perhaps even falling. S&P Global Platts Analytics has lowered its full-year forecast for Permian Basin gas production by nearly 0.2 Bcf/d from the level expected in March. The 2021 forecast was reduced by 1.4 Bcf/d to an average of 13.9 Bcf/d.

As crude prices have continued to decline over the past month, further downside risk to associated gas production is apparent. Production cuts can affect pipeline volumes and the timing of expansion projects. That, in turn, can affect the amount of gas available to feed LNG export terminals. Those dynamics can be complicated if liquefaction facilities cut output as end-users defer or scrap cargoes. With that as a backdrop, the summer outlook could be dim.

PODCAST: Coronavirus poses dim near-term picture for North American midstream

"What happens when European storage reaches its maximum capacity in the summer?" Alex Dewar, a senior manager at Boston Consulting Group's Center for Energy Impact, said in an interview Friday. "That is likely to be the trigger for more cancellations. US terminals will likely bear the brunt of that."

Kinder Morgan, which moves more than a third of the gas consumed in the US and operates the Elba Liquefaction facility in Georgia, will report its latest financial results on Wednesday, followed by Enterprise Products Partners on April 29, Columbia Gas Transmission operator TC Energy on May 1, Transcontinental Gas Pipe Line operator Williams on May 4 and Rover gas pipeline operator Energy Transfer on May 11. Cheniere Energy, the biggest US LNG exporter, reports earnings April 30.

Kinder Morgan's El Paso Natural Gas Pipeline network will have increased access to Northwest Mexico demand markets as Kinder Morgan's subsidiary Sierrita Gas Pipeline officially placed an expansion project into commercial service on April 12.

Capacity on the Sierrita Pipeline increased from 200 MMcf/d to 627 MMcf/d and may help feed pent-up demand in the state of Sonora, according to Platts Analytics. The Sierrita Pipeline expansion could help serve future demand like a proposed LNG export terminal near the city Puerto Libertad.

In Texas, Kinder Morgan has a significant – and growing – footprint of gas pipeline assets around the Permian Basin.

TEXAS FLOWS

The greenfield 2 Bcf/d Permian Highway Pipeline project will help carry future West Texas supply east towards the Texas Gulf Coast. However, construction was halted on a segment of the pipeline March 28 due to a drilling fluid spill. It is unclear when work will resume at that location, but the accident may impact the expected in-service date in the first quarter of 2021.

On the downside – the coronavirus' impact on future demand.

Over the past month, the WTI forward curve for the rest of 2020 has declined by 13% from mid-March to $29.64/b April 16 and adds further downside risk to associated gas production in the Permian Basin. That said, lower crude prices have increased the 2020 Waha forward curve by nearly 40% over the past month, pushing aside any downside price movements from the delayed PHP project.

Spot US gas prices remain in the doldrums. In the Southeast, spot gas prices have remained firmly below the $2/MMBtu water mark, with cash Henry Hub settling in a range of $1.445 to $1.80/MMBtu over the last 30 days.

TERMINAL UTILIZATION

Utilization at US liquefaction terminals, meanwhile, has remained relatively strong in recent weeks, even as international LNG prices have plummeted and remained at depressed levels.

In the medium to long term, the challenges could be greater for US exporters, especially for developers looking to commercialize LNG terminals, with new capacity being pushed into the market from Qatar and Russia.

In the near-term, some market participants expect a drop in US output in the weeks ahead. Who will blink first among US LNG producers remains to be seen.

"It's a game of chicken," Dewar said. "In some ways, as bad as it is for LNG right now, in the broader scheme of things, LNG is just so much more resilient, and a positive story, compared with what is happening on the oil side."

He added, "We're still talking about an LNG market that is stable to a modest decline from how we have modeled it, as opposed to oil where the question is, how does the industry ever rebound from this level of demand destruction?"