Despite devastating weather that sent energy market participants into a frenzy, the average of the 12-month forward curve for WTI remained flat month on month at $50.43/b. However, internal rates of return (IRR) increased across the board due in large part to higher natural gas liquids (NGLs) prices.
More than three weeks ago, Hurricane Harvey hit the US Gulf Coast with an estimated 51 inches of rain near Mt. Belvieu, Texas, a prominent US NGL price hub. As a result, the entire midstream sector was forced to respond, sending liquids prices higher. While we typically think of the Permian and Eagle Ford basins as oil plays, there are a fair amount of NGLs produced as well. A typical well in both the Permian and Eagle Ford has an NGL composition of around 25%, and with higher liquids prices, returns in each play have benefited. IRRs in the Permian Delaware and Eagle Ford increased 1.3 percentage points to 32% and 25%, respectively.
While the full impact to crude oil production remains to be seen, it’s clear the storm will have a lasting effect on producer activity in the Gulf. Prior to Harvey’s landfall, a number of producers scaled back drilling operations while shutting in a number of wells. Using Platts Analytics’ Eagle Ford natural gas production sample as a guide, as much as 800,000 b/d of crude oil production could have been shut in during the storm.
Similarly, on the gas side, natural gas prices remained relatively stable. However, the 14 cents/MMBtu increase in the 12-month forward curve sent IRRs in gas-focused plays higher. Rates of return in the Northeast saw the greatest increases as the early stages of an unconstrained takeaway environment began to unfold.
In the last week, two long-awaited expansion projects have begun service, most notably Energy Transfer Partners’ Rover Pipeline Project. On September 1, Phase I of the project began partial service, less than 24 hours after receiving US Federal Energy Regulatory Commission approval. Since then, production receipts on the pipe have increased to 700 MMcf/d, roughly 45% of the total Phase I capacity.
During this time, local supply prices at Dominion South have increased as producers are becoming increasingly able to find a home for their gas. Returns in the Utica dry, a key supply source for Rover, increased 2.2% from last month to 11.31% this month. Additionally, the TGP Susquehanna West project, which will transport up to 145 MMcf/d of producer-backed Marcellus gas in Northeast Pennsylvania to the National Fuel Gas Supply pipeline in Potter County, Pennsylvania, began service. Typically during this time of year, demand in Northeast Pennsylvania is on the decline, and while the well economics in Northeast Pennsylvania dominate those of competing Appalachia plays, supply is generally locked in. However, TGP Susquehanna West is helping to relieve those constraints. Returns in the Marcellus dry, which makes up much of Pennsylvania, increased 3.5% to 12.7% in September.