Analysis: Appalachia gas production edges back toward annual highs as EQT restores output

New York — Gas production in the Appalachian Basin has recently edged its way back toward highs not seen since early May as output previously curtailed by the region's largest producer, EQT, now appears to be fully restored.

In the past week, combined production from the Marcellus and Utica shales has averaged nearly 32.2 Bcf/d – up 1.2 Bcf/d, or about 4% from its mid-May average, S&P Global Platts Analytics data shows.

At Appalachia's benchmark supply hub, Dominion South, cash prices have remained near $1.30/MMBtu recently – comparable to levels seen after EQT's production curtailments – as record gas-fired power burns this summer help to balance the additional supply length.

On July 16, the cash market at Dominion South was nearly flat to its prior-day settlement, trading down just a half-cent to $1.285/MMBtu, preliminary trade data from S&P Global Platts showed.

Roughly half of the recent gain in output has come from just five production meters used by EQT on Equitrans, Rockies Express Pipeline, Columbia Gas Transmission and Texas Eastern Transmission.

Over the past five days, upstream receipts from those points have averaged a combined total of 2.7 Bcf/d, which compares to an average 2 Bcf/d in the five days after EQT announced its curtailments.

Within the Appalachian Basin, the largest production gains have accrued in the South Pennsylvania dry window, with smaller gains from West Virginia and the Ohio dry – the same three sub-basins that saw steep declines following EQT's mid-May production cuts.

Production outlook

Over the balance of this year, Appalachian gas production is likely to remain below previous record-high levels at over 33 Bcf/d as growth is constrained by slower drilling and completion activity, limited midstream capacity and low gas prices.

By late August, many of Appalachia's largest producers, including EQT, Cabot Oil & Gas, Range Resources and Southwestern Energy, will report second-quarter earnings, offering an updated forward look at production guidance for the second half of 2020. On Q1 earnings calls, most of the region's producers reiterated their plans for capital discipline and maintenance-level drilling and production this year.

With Appalachia's producers cutting roughly one-third of their rigs and well completions already this year, Platts Analytics is forecasting production to remain roughly flat through the fourth quarter.

In addition to producer restraint, limited midstream capacity is also likely to keep downward pressure on output growth this year. According to Platts Analytics, recent flows through major constraint points exiting Appalachia are now within about 600 MMcf/d of available capacity.

Low gas prices are another factor likely to constrain growth this year. Balance of the year forwards prices at Dominion South are currently averaging just $1.57/MMBtu, down from a forward-curve average of nearly $2/MMBtu at this same time last year, S&P Global Platts' most recently published M2MS data shows.