Denver — Growing pressure on Appalachian producers from low prices, midstream constraints and a hawkish investor community could be enough in 2020 to finally pause a decade-long rise in the basin's natural gas production.
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While obstacles to growth are nothing new in Appalachia, the recent confluence of challenges has raised serious doubts for market observers about producers' capacity to keep output growing in the Marcellus and Utica shale plays during 2020.
Perhaps the biggest test for producers has come from the market itself. Over the past nine months, gas prices at Appalachia's primary supply hub, Dominion South, have averaged less than $2/MMBtu, testing wellhead breakeven values, even for the most efficient, low-cost producers.
The Northeast's low-price environment doesn't show much potential for improvement either.
For calendar year 2020, the forward price curve at Dominion South is currently sitting at just $1.90/MMBtu with peak winter-season prices barely eclipsing the $2/MMBtu threshold.
Lower liquids values have added to the recent price pain for Appalachian producers.
In the fourth quarter, prompt propane prices at Mont Belvieu have averaged 50 cents/gal, which is down about 16 cents, or nearly 25%, compared to the first quarter, S&P Global Platts data showed.
Other NGL prices have seen similar downward pressure this year. While the surplus in liquids should get some relief from winter heating demand through the early months of 2020, an oversupplied market is likely to return as that seasonal uptick ebbs in March.
MIDSTREAM BUILDOUT
Low prices aren't the only challenges Appalachian producers will face next year.
Much of the work on the final portion of 2 Bcf/d Mountain Valley Pipeline has been paused since mid-August amid a legal challenge over endangered species protections. For now, Appalachia's seemingly endless buildout of midstream capacity has come to screeching halt.
Among the remaining projects with scheduled completion dates in 2020, 2021 or 2022 -- including Atlantic Coast Pipeline (1.5 Bcf/d), PennEast Pipeline (1.1 Bcf/d), Northern Access (500 MMcf/d) and Constitution Pipeline (650 MMcf/d) -- stalled permits and legal battles over permit validity are stopping pipeline construction from proceeding or in some cases even starting.
With pipelines already in the ground likely to provide the only outlet for Appalachian gas in the foreseeable future, producers face a two-pronged problem in the 2020s: market access and prices.
While the additive nameplate capacity of production-supporting pipelines still exceeds current Appalachian production levels -- now approaching 34 Bcf/d -- not all of that capacity provides equal market access. In fact, the terminus of many existing and even planned egress pipelines lead to markets or transportation corridors that are already saturated.
A secondary, but no less important, issue for producers, is the low prices implied by that limited market access. At hubs like Dominion South, limits to market access have kept in-basin prices trading at more than a 40 cent/MMBtu discount to benchmark Henry Hub gas this year.
INVESTORS
For the investment community, low gas prices and weak margins are at the heart of a recent pressure campaign on producers to maintain free cash flow and return value to shareholders in 2020.
On recent quarterly earnings calls many Appalachian producers signaled their intentions to slow drilling and production in 2020 as the industry responds to market and investor pressures.
Speaking for one of the largest producers in Appalachia, CEO William Way said that Southwestern Energy would reduce or even halt drilling activity if commodity prices reach unsustainable levels.
"We did it in 2016 for the same reason and we'll do it again," he told investors and analysts on the company's third-quarter earnings call in late October.
Cabot Oil & Gas CEO Dan Dinges said during the company's earnings call that Cabot would enact a contingency plan to dial back 2020 spending by as much as 18%, or $125 million, and keep production at maintenance levels if gas prices remain below $2.50/MMBtu.
Range Resources executives told analysts that they planned to extend fourth-quarter spending cuts into 2020 and even were comfortable with modest production declines that preserve unit cost levels.
According to S&P Global Platts Analytics, the combined market and investor pressures on Appalachia's producers should be sufficient to keep regional production growth to just a fraction of 1% next year.
-- J. Robinson, jrobinson@spglobal.com
-- Edited by Kshitiz Goliya, newsdesk@spglobal.com