EQT second-round curtailments pull Appalachian gas production lower in September

New York — Upstream curtailments by Appalachian producer EQT are pushing regional gas production lower this month in a trend that could accelerate into the fourth quarter on lower prices and dwindling midstream capacity.

On Sept 1., EQT began curtailing a net 425 MMcf/d in gas production, as the company awaits an anticipated bounce in commodity prices by this winter. The curtailments, announced by executives in an investor presentation at the Barclay's CEO Energy-Power Conference, have no end-date yet announced.

The curtailed volume is just a fraction of an earlier 1.4 Bcf/d cut by EQT from mid-May to mid-July, also prompted by an intent to capture higher forwards prices. Still, the recent pullback by EQT appears to be dragging total Marcellus and Utica production lower this month. From Sept. 1 to date, Appalachian production has averaged 32.5 Bcf/d – more than 300 MMcf/d lower compared with the monthly average in August, data compiled by S&P Global Platts Analytics shows.

The announced production curtailments align with pipeline sample data, which shows receipts in southwestern Appalachia falling roughly 400 MMcf/d this month to date compared with the August average. At the pipeline level, Equitrans and Texas Eastern Transmission have both seen production receipts fall by about 250 MMcf/d each this month, two pipes on which EQT is a large capacity holder.

Prices

Coincidentally, EQT's curtailments comes just as basis prices at several of Appalachia's key upstream hubs edge higher. Over the past week, Dominion South basis has climbed to average a 73 cent/MMBtu discount to Henry Hub. At Columbia Gas Appalachia, basis has edged up to a 57 cent/MMBtu discount to the benchmark. From mid-August to early September, prices at both hubs traded at more than a $1/MMBtu discount, S&P Global Platts data shows.

As late-summer temperatures continue to cool, waning shoulder-season demand will likely put renewed pressure on prices. Already this month, total Northeast demand has fallen to an average 15.5 Bcf/d, a 1.6 Bcf/d decline from August levels. According to Platts Analytics, the return to a $1+ discount to Henry Hub could be imminent, as producers rely increasingly on outflow corridors running at- or near-capacity, and storage inventories that are already sitting above five-year normal levels.

Even winter weather may not be enough to balance Appalachia's gas market this year. In recent trading, December to February calendar-month forwards at Dominion South have remained at just a 60 cent/MMBtu discount to Henry Hub. During the same peak-winter months last year, prices were notably higher, averaging a 25 cent/MMBtu discount to the benchmark.

Production

Over the balance of 2020, current Analytics forecast show Appalachian gas production strengthening modestly by late fourth quarter to around 33 Bcf/d.

Through at least early October, though, further declines in supply could be required in order to balance an increasingly long regional market. Whether other producers follow EQT's lead and curtail production on their own, or market fundamentals drive the balancing, remains to be seen.

On EQT's second-quarter conference call July 27, CEO Toby Rice told investors and analysts that future production curtailments would remain a possibility over at least the next several years – particularly during spring and autumn shoulder seasons – as the company remains in maintenance-production mode.