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Analysis: Pipeline project slowdown may challenge Northeast production growth

Highlights

Pipeline buildout slowed dramatically

Potential constraint on production growth, outflows

Denver — The Appalachian basin has effectively become "de-bottlenecked" following a wave of pipeline project start-ups. But with virtually no new production-takeaway capacity expected to come online in the next year, the Northeast could be on a path to becoming "re-bottlenecked" as rising production fills existing capacity.

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In 2018 roughly 8 Bcf/d of producer-backed pipeline capacity was added to the Northeast region as a handful of high-volume expansion projects that had been years in the making finally came online. Last year saw the full start-up of the greenfield Rover Pipeline and Nexus Gas Transmission systems, as well as expansions on existing pipelines including the Atlantic Sunrise project on Transcontinental Gas Pipe Line, and the WB XPress and Leach XPress projects on Columbia Gas Transmission.

This wave of new capacity installations in 2018 helped drive the largest single year-over-year Northeast production gain on record, with output rising by 21% year on year to an average 28.6 Bcf/d. And this mis-match between capacity added (8 Bcf/d) and production grown (4.9 Bcf/d) is the underlying driver behind huge improvements in basis prices across Appalachia, which went from being valued at a significant discount to Henry Hub to now trading, at times, within variable costs of transport to the Gulf.

But the pipeline buildout has already slowed dramatically, and the next several years combined are expected to see less new capacity enter service than came online in 2018 alone. The two main projects under construction, the 2 Bcf/d Mountain Valley Pipeline and the 1.5 Bcf/d Atlantic Coast Pipeline, have faced significant construction delays and cost increases, and their in-service dates remain uncertain. Besides those, there are very few new expansion proposals before the Federal Energy Regulatory Commission that would support higher production and outflows in the years ahead. Furthermore, new pipeline projects can take anywhere from three to five years to go from open season to commercial service. In short, the pipeline that's in the ground now is essentially all the Northeast region has to work with, capacity-wise, for the foreseeable future.

NAMEPLATE VS. EFFECTIVE CAPACITY

In addition to a thin slate of new capacity proposals in the years ahead, another factor compounding the risk for a re-bottlenecked Northeast region is the difference between the region's nameplate capacity amount and its effective capacity amount. Nameplate capacity refers to the underlying contracted quantities associated with a certain project or pipeline, while effective capacity refers to the available takeaway or market demand downstream of those pipeline segments. And when viewing the region through the effective capacity lens, it no longer appears to be as over-built as its nameplate capacity would suggest.

For example, the 2.7 Bcf/d Mountaineer XPress project entered service in January on Columbia Gas, with the majority of its capacity underpinned by regional exploration-and-production companies. However, its 2.7 Bcf/d of capacity does not allow that much gas to move outside the Northeast region. Instead, roughly 0.9 Bcf/d of incremental gas will be able to flow to the high-demand Southeast market area via an expansion on Columbia Gulf Transmission, while the balance of the project's capacity will be delivered to the TCO Pool pooling area on the Columbia Gas system. Therefore, its effective capacity is limited by how much gas can physically be moved outside of the Appalachia producing area.

Going through this exercise across the slate of pipeline projects in the Northeast shows that effective capacity could pose a constraint on production growth and outflows. With production expected to continue to climb, and with few new capacity proposals on the docket at FERC, it becomes a question of not if but when Northeast production will again test the region's upper capacity limits.

-- Eric Brooks, ebrooks@spglobal.com

-- Edited by Jim Magill, newsdesk@spglobal.com