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Gas production growth, pipeline constraints leave Appalachian cash basis lagging


Marcellus, Utica output up nearly 1 Bcf/d year to date

Gains concentrated in Northeast Pennsylvania, West Virginia Wet

Northeast-to-Southeast corridor now over 100% utilized

  • Author
  • J Robinson
  • Editor
  • Joe Fisher
  • Commodity
  • Natural Gas

New York — Geographically concentrated production gains in Appalachia this year are now fueling widespread basis price weakness there as long-haul transmission pipelines serving the region approach capacity.

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Year to date, gas production from the Marcellus and Utica has averaged 33.2 Bcf/d – up nearly 1 Bcf/d, or about 2.8%, compared with its first-quarter 2020 average, S&P Global Platts Analytics data shows.

This year's gain in output, though, hasn't been shared equally across Appalachia's tri-state region. In fact, nearly all of the annual production gain has come from Northeast Pennsylvania and the West Virginia wet window where output is up 640 MMcf/d and 910 MMcf/d, respectively, from 2020.

In Ohio, production is actually lower on the year by nearly 500 MMcf/d. Smaller declines have come from Pennsylvania's South and Southwest producing regions, and from the West Virginia Huron.

While Appalachia's production gains have accrued primarily in just two locations, the region as a whole has faced severe basis price weakness at upstream supply hubs. Growing congestion on the region's shared production takeaway pipelines could be to blame.

Basis prices

Month to date, outright cash prices across Appalachia – ranging from the upper $1s to low-$2s/MMBtu – are actually higher compared with year-ago levels. For the region's producers this year's 60- to 70-cent cash-price gain has still lagged the annual rise in prices seen at the US benchmark Henry Hub.

At Dominion South, cash basis is down about 15 cents compared with its March 2020 average. Comparable declines ranging from 9 cents to as much as 20 cents have been registered across the region at hubs such as Texas Eastern M2 Receipts, Tennessee Zone 4 200 leg, Columbia Gas Appalachia, and other locations, S&P Global Platts data shows.

Appalachia's widening discount to the Henry Hub has likely been exacerbated by slumping shoulder season demand in the Northeast. As producers ship more gas to neighboring regions, rising capacity utilization on production takeaway pipelines has weighed on regional prices vis-à-vis Henry Hub.

Takeaway capacity

In March, utilization on Appalachia's long-haul transmission lines to the Southeast has averaged about 101% of capacity, according to Platts Analytics. That's up from an average utilization rate just below 97% last March. While transmission corridors to the Midwest have some spare capacity, utilization rates on those pipelines is also higher this year, averaging 84% month to date, versus 81% in March 2020.

As transmission capacity to the Southeast and the Midwest continues to dwindle, Appalachian producers are now awaiting just a single major production takeaways project – the 2 Bcf/d Mountain Valley Pipeline, which could enter service by late 2021. According to Platts Analytics data, the region's other planned supply-driven projects include just a handful of much smaller pipeline expansions.

In the forwards markets, traders aren't anticipating much relief for Appalachia's basis price blues this year. At Dominion South and Texas Eastern M2 receipts, both key upstream locations, calendar-month averages for April to October are currently trading around 80 cents behind Henry Hub, S&P Global Platts M2MS forwards data shows.