Decisions to defer natural gas production in the Appalachian Basin this year are providing an opening to snatch up released firm pipeline capacity at a lower price, Southwestern Energy Co.'s chief said Friday. Range Resources Corp. also said it has begun buying unused capacity.
Notably, Chesapeake Energy Corp. in December began curtailing 250 MMcf/d of gross operated gas production in the Marcellus Shale because of low basin prices (see Shale Daily, Feb. 25). Cabot Oil & Gas Corp. is dropping two of its five Marcellus Shale rigs, and its production is set to come down this year (see Shale Daily, Feb. 20).
Chesapeake CFO Nick Dell'Osso said last Wednesday that other operators in the area have begun curtailing gas during the fourth quarter as well. Appalachia-focused operators Rice Energy Inc. and Magnum Hunter Resources Corp. also are pulling back (see Shale Daily, Feb. 18).
Chesapeake's curtailments continued in the first quarter at rates as high as 20,000-25,000 boe/d, Dell'Osso said. Those curtailments are to "remain in place for all of 2015" on projected weak pricing in the northern part of the play.
Getting a handle on the amount of available unused pipeline capacity still is difficult, but Appalachian gas operators desperate to move their production are more than happy to take it, Southwestern CEO Steve Mueller told analysts during a fourth quarter conference call. The gas-weighted producer last fall paid $5 billion to acquire an additional 413,000 net acres from Chesapeake in Pennsylvania and West Virginia (see Shale Daily, Oct. 16, 2014). As part of the transaction, Southwestern assumed part of Chesapeake's firm transportation and processing capacity agreements. Southwestern in April 2013 bought 162,000 net acres from Chesapeake in Pennsylvania, which at that time doubled its leasehold to more than 337,000 net acres (see Shale Daily, April 30, 2013).
Mueller's team is projecting that by around 2020, Southwestern could be moving up to 2.5 Bcf/d from the new Chesapeake addition alone. Any unused capacity that the producer can tap today is a bonus.
Since the acquisition closed, Southwestern has picked up about 175 MMcf/d of unused capacity on a three-year term, COO Bill Way said.
“Our guys are out opportunistically picking these up and we feel very comfortable we can continue to do that," he said.
Southwestern is securing gas volumes that were "committed by other companies, so it's available today," Mueller said. Those original capacity contracts provided prices that were "low, so you’re talking about 30-cent type numbers, 30-40 cent numbers versus 50-60 cents."
Between now and the end of 2016, "what we will do is work with other operators that have excess capacity and use their capacity. On a percentage basis, selling into a daily market isn't going to be that high a percentage. We think there is plenty of excess capacity we can work off between now and '16. You will see us in the near future commit to probably close to 1 Bcf/d. That would be the '17, '18, '19 time frames."
Range is putting nearly all of its capital expenditures (capex) this year into Appalachia (see Shale Daily, Feb. 25). During a quarterly conference call last Wednesday, Senior Vice President Chad Stephens, who handles corporate development, said Range is buying excess pipeline capacity to dovetail with projected increasing volumes through 2018.
"Going forward, we think that there is release capacity markets we've already been involved in to get into again [offering] relatively cheap or inexpensive firm transport to layer into the areas we want to get our markets too," Stephens said. Range's "main objective is to try to get as much of our volume out of Appalachia into other areas Midwest, Gulf Coast and Southeast, and in the future we want to try to do that as well.
"We think that with rig rates coming down, capex budgets being cut, projected volumes will be coming down in those companies that committed to firm transportation volumes that will not be using all of that capacity. So we're going to take advantage of that and get into the release capacity markets and when needed, speak up for some of that released capacity."
Mueller said the gas market in Appalachia is going through a makeover that eventually may change how firm capacity contracts are cobbled together.
"Historically, we've talked about the fact that you have to have firm," Mueller said. "At some point, we believe that in the not-too-distant future, the Northeast will have more than enough capacity from a takeaway standpoint and then firm isn't as important. So one of the things you'll see us doing, whether it’s the 1 Bcf that I’m talking about [for the near term], or any other firm that we might think about adding on top of that, we'd be looking at the shorter contract term life, not necessarily the 15- to 20- [year terms] but more like the 10s.
"We’ll certainly be watching very closely the cost and where that [gas is] going to...Once you do have all the capacity you need, then the firm isn't as important, and it actually becomes an issue if you paid a lot for it or you have long-term time frame-wise contracts. We know we need 1 Bcf/d. We know that somewhere around 2020 we can certainly be producing 2.5 Bcf/d-plus...There's 1 Bcf we need, and we'll sort through what else we need after that."