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Williams Coping With Curtailed Natural Gas Volumes in Appalachia

Williams is preparing for curtailed natural gas volumes from some of its customers in Appalachia because prices are low and there's no expectation on when they may improve, CEO Alan Armstrong said Thursday.

Speaking with analysts during a conference call to discuss first quarter results, Armstrong said there already are some price-related curtailments.

"We haven't seen that fall into necessarily the drilling operations, but we have seen it in terms of just physical shut-in of production," which is "going to dampen some of the expected growth from our Northeast volumes."

Armstrong made clear he isn't referring to deferred, uncompleted wells, but "actual shut-in of existing flowing production...We are not seeing a lot of drilled wells not being completed, we are just seeing actual decisions to shut-in production because of extremely low netbacks in some of the constrained areas up in the far Northeast part of the Marcellus."

Regarding shut-in volumes by its customers, Armstrong said 300-500 MMcf/d is expected to be shut in for five or six months. Volumes include those by frequent Appalachian partner Cabot Oil & Gas Corp., which has curtailed production volumes and expects to produce around 1.55 Bf/d gross in the second quarter. The company also is monitoring prices "before we make any decisions on selling more gas into the local market," CEO Dan Dinges told analysts last month (see Shale Daily, April 24).

National Fuel Gas Supply Corp.'s exploration arm indicated on Friday that it curtailed on average 150 MMcfe/d in its fiscal second quarter ending March 31; it earlier in the year had shut in around 200 MMcf/d (see Shale Daily, March 20). Chesapeake Energy Corp. has shut in 250 MMcf/d for the year from Appalachian operations.

"When the systems are full up there and there is not enough market...the spot incremental sale gets extremely low and puts pressure on their other production," Armstrong said. Since Cabot is a large producer, "they tend to put pressure against their own sales. And so we think this is short-lived but and maybe [into] second and into the third quarter a little better, but that's about it...That's the amount we expect."

The Northeast gas market continues to evolve, he said. Growing gas volumes from the Utica Shale, dry and wet, weren't built into the plan, "but we are seeing more and more evidence of the combination of the Utica dry along with the Marcellus wet," particularly around the Ohio Valley Midstream system, which serves operators in northern West Virginia, southwestern Pennsylvania and eastern Ohio.

"The other side of that coin is the great success that they are having is continuing to put pressure on the bottlenecks and constraints getting out of the area. And so, again I think we are excited about seeing all of this demand pool coming into the market on our Transco system because we know where there are some great supplies that can help feed that for years to come and continue to grow the market steadily. But I think we are going to continue to see pretty moderate drilling in the Marcellus and the Utica as forecast. We don’t see really big changes to that. And I think really the only surprise to this for the quarter was just the shut-ins due to lower prices was really the only surprise we have seen on the volume side."

Management already is looking down the road to consider how liquefied natural gas (LNG) export projects may impact its pipelines, particularly Transcontinental Gas Pipe Line LLC (Transco). Mexico gas expansions also are promising.

"We have...some sizable opportunities as the market continues to build out for the LNG," said Armstrong. "Transco...is extremely well positioned to serve many of the LNG projects...We have gone through some very successful open seasons and so that's adding some projects. And as well, we have got some opportunities to serve Mexico that have come on the radar screen as well. Overall, it's a combination of new projects in the medium-term that have been added in and are firming up very nicely and further out on the back end some of these new projects that has Transco serving markets in the southern end of its system.”

Even though lower production from its gas customers has impacted volumes, Williams is making up some of the shortfall with reductions in costs. For instance, capital expenditures for the Atlantic Sunrise pipeline project fell by about $200 million sequentially.

"If you think about all of the resources, and whether it's steel mills or skilled labor...that we are supporting some massive drilling operations here in the U.S. and the fact that those are now slacking, we really are starting to see [reduced costs] come through," Armstrong said.  Pipeline costs fell, with the price of steel coming down. "And we also are seeing much softer prices on the contractor rates for construction practices as well."

Williams reported first quarter income fell by half year/year to $70 million (9 cents/share) from $140 million (20 cents), attributed in part to lower natural gas liquids (NGL) margins. Losses were offset by new fee-based revenues from the Gulf of Mexico Gulfstar One project and Transco expansions. Williams Partners earned $917 million, 19.4% higher year/year, with a big contribution from the merger with Access Midstream Partners LP. The Williams NGL and petrochemical services unit registered an operating loss of $5 million, in line with a year-ago loss.

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