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Analysts Expect Dry Gas Shift by Appalachia Producers

An analysis conducted by Wells Fargo Securities of the Northeast's natural gas liquids (NGL) market shows that while the decline in commodity prices will slow production in the long term, liquids volumes are likely to continue increasing incrementally for the next four years or so.

West Texas Intermediate (WTI) has barely held on above $50/bbl for any significant period of time since last year. Brent crude, which NGL prices track more closely given export-driven demand, hasn't fared much better as of late. The commodities environment prompted Wells Fargo to lower its estimated Northeast NGL production estimates by 15-20% in its March analysis.

NGL composite prices averaged 48 cents/gallon in January and 54 cents/gallon in February, down from the most recent peak of about a $1.25/gallon in January 2014. As a result, Wells Fargo said exploration and production companies in the Appalachian Basin are more likely to shift drilling in the Marcellus and Utica shales to dry gas, where the economics are "now roughly at parity with drilling the wet gas window" (see Shale Daily, March 20).

Even with the pullback, however, the bank said propane production in the Marcellus and Utica could increase to 251,000 b/d in 2019 from less than 100,000 b/d last year. Normal butane could see a similar increase, going from roughly 25,000 b/d in 2014 to 74,000 b/d in 2019, under Wells Fargo's forecast.

Barring any immediate rebound in commodity prices and acceleration in drilling activity, Wells Fargo also said that new takeaway projects totaling 325,000 b/d would be sufficient to keep the market in balance for the next three years. In its 2014 report, the bank said NGL supply growth could exceed regional takeaway capacity by 350,000 b/d by 2018.

"For now, we do not foresee the need for any major incremental NGL projects in the Northeast over the next one to three years," the latest report said.

Midstream companies have also announced plans to increase processing capacity in the Marcellus and Utica by more than 10 Bcf/d by 2017. About 70-90% of the processing capacity is expected to be utilized over the next five years, while 60-100% of the planned fractionation capacity is expected to be utilized during the same time.

Those estimates, Wells Fargo said, assume ethane prices recover in 2017 and blending and rejection is significantly reduced. The anticipated slowdown in liquids production and adequate infrastructure would also prevent the need for any additional processing capacity for the next three years.

The incremental growth in liquids volumes, however, is expected to be stoked by a combination of factors, including reduced imports from the Gulf Coast to the Northeast; increased exports to other parts of the country and adequate local demand.

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