Appalachian Basis: Pipeline Capacity Likely Sufficient

The Appalachian basin is likely to have ample pipeline takeaway capacity for the foreseeable future. With abundant spare pipeline capacity, we expect that Appalachian benchmarks will continue to show a narrowing of basis relative to Henry Hub. Appalachia’s “basis blowouts” seen in 2015 and 2016 are probably a thing of the past…at least for the next 4-5 years.

Surplus pipeline capacity from the Appalachian basin (i.e. the gap between Appalachia’s net production and take-away pipeline capacity) has widened in recent years, and through the COVID-19 pandemic. Regional net production stood at about ~15 Bcf/d in the first quarter of 2016, just under takeaway capacity of ~16 Bcf/d, leaving only about 1 Bcf/d in total spare pipeline capacity exiting the basin. That gap has widened considerably owing to multiple natural gas pipeline projects that came online over the past three years. Consequently, there was nearly 9 Bcf/d of spare capacity in 2Q2020 (net of local demand). This dynamic cannot be fully attributed to COVID, either. Gas-directed rig counts and shale production showed softness even before the coronavirus.

We expect it will take some time for production to recover and grow in a meaningful manner, but we are currently projecting that pipeline capacity will continue to be built-out as projects that received a positive FID in 2018-19 are now nearing completion. It’s also worth noting that capacity utilization varies across different “pipeline corridors” in Appalachia (if you’d like a more fulsome report on these pipeline corridors drop us a line) with the Gulf Coast and Midwest pipeline corridors more highly utilized than others. We expect that pipeline takeaway capacity will grow from ~31 Bcf/d today to about ~36 Bcf/d by 2025. Nevertheless, we believe that net production’s recovery will be somewhat sluggish, with net production not rebounding to pre-pandemic peaks until 2023.

How will greater spare capacity impact prices and natural gas marketing strategies? Is this a big play for marketers and traders to provide AMA services to the producers – esp. producers that have overcommitted to pipeline take-away capacity? Given that overall take-away utilization will likely show softness, we suspect that Appalachian benchmarks, as a whole, will enjoy narrower basis to Henry Hub than in years past. Some corridors could face constraints, but the basis blowouts are likely behind us.