Liquefied Natural Gas (LNG) exports are expected to help close the spread between Henry Hub and Appalachian prices in the coming years, according to a report from Canaccord Genuity.
It's no secret that the success of Appalachian producers working in the Utica and Marcellus shales has upended the historical supply-demand dynamic across much of the U.S. But pipeline and processing constraints in Ohio, West Virginia and Pennsylvania have created stubborn headwinds for many of the basin's operators.
But forecasted increases in pipeline and processing capacity, coupled with new technologies and rising demand for LNG from overseas, Canaccord said, will significantly improve natural gas price realizations beginning in 2016.
"We anticipate the unprecedented uplift in natural gas demand from domestic utilities, international power companies via liquefied natural gas exports and multinational industrial companies relocating to the U.S. Gulf Coast will narrow the spread between Henry Hub and the Appalachian Basis points," said report author Karl Chalabala. "While a rising tide lifts all boats, we anticipate this demand will benefit the Appalachian producers versus other basins the most, given the low-cost structure of these companies, adjusted for transport cost."
Canaccord said in its report that unconventional production in the basin should more than double from the first half of this year to the end of 2018 to about 35 Bcfe/d. The most robust growth will likely occur in the Utica Shale as the play continues to emerge and operators push into West Virginia to drill the formation there (see Shale Daily, March 26). The analyst said dry gas production is expected to be strong in northern West Virginia, where it showed Chevron Appalachia LLC had tested its Conner 6H well at 25 MMcf/d in Marshall County.
Canaccord's pipeline analysis shows capacity beginning to outpace supply during the first half of 2016. The firm estimates that there are currently 43 major Appalachian pipeline projects planned that together could move more than 100 MMcf/d from the basin. That represents 25 Bcf/d of incremental capacity for Marcellus and Utica gas by the end of 2017.
If industrial and power sector demand increases within a regulatory framework that currently appears to favor natural gas, the analyst said operators will need all the capacity they can get in the Northeast.
Chalabala said the firm's supply-demand model forecasts that new domestic power generation, LNG exports and industrial demand, from sources such as the petrochemical industry, will mean an incremental 28 Bcf/d of demand by 2020.
"We believe the White House's use of natural gas to disrupt coal pollution and carbon release translates into regulatory support for new domestic gas projects -- plant or pipe -- which supports our thesis that gas-fired power generation will bridge the gap to the LNG and industrial demand ramp we estimate beginning significantly in 2016," the report said.
Canaccord only forecast LNG projects that have applied to the Federal Energy Regulatory Commission and have filed with the U.S. Department of Energy for non-free trade agreement export clearance. It estimated that such projects will add 16 Bcf/d of demand by 2020.
The report said two groups of multinationals are poised to seize on U.S. LNG opportunities like “dogs on a bone,” particularly those looking for overseas power generation supply and others looking for feedstock/input advantage at petrochemical facilities.
DOE’s efforts to streamline its LNG permitting plan could also help facilitate better price realizations sooner by selecting projects more likely to be completed (see Daily GPI, May 29)
The report highlighted many of the LNG offtake agreements that have already been signed with overseas electricity providers such as India’s Gail and Japan’s Chubu Electric.
“The overwhelming interest in the new U.S. supply of gas stems from the pricing structure. The offtake agreements signed by these companies are gas-linked, typically Henry Hub plus a premium and a capacity charge,” Chalabala said. “This represents a radical and cheaper shift from pricing structures tied to oil indices as most currently are.”
Although he acknowledged that the outlook is bullish at the moment, Chalabala said that all the natural gas currently stuck in place across the Appalachian Basin will uniquely position operators there with major export opportunities, especially those with “inventory depth and Gulf access.”