Rising U.S. onshore production and the oversupply that continues to stoke concerns about near-term drilling economics and price realizations in the Appalachian Basin could slowly be reversed with a basis uplift beginning in 2016 if demand, midstream bottlenecks and new technology improve as forecasted, 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 and 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.
Even after a brutally cold winter in which the summer strip was expected to be aided by a robust storage refill, investors have persisted with their bearishness of independent oil and gas companies with gas-weighted production profiles. Earlier this week, the Energy Information Administration again forecast a 0.425 Bcf/d increase in natural gas production nationwide. The Marcellus alone is forecast to surpass 15 Bcf/d next month (see Shale Daily, July 14).
Analysts at Tudor, Pickering, Holt & Co. said Thursday that stocks of gas-weighted companies, such as Rice Energy Inc. and Gulfport Energy Corp., have continued to take a beating in recent months, underperforming their oily peers by more than 20%. Yet a number of forecasts show the long-term outlook improving for those operating in the Northeast (see Shale Daily, April 2), including Canaccord's report on Thursday.
The financial services firm said it anticipates unprecedented demand for natural gas that will begin ramping-up in 2016. It also said next generation technology that's expected to increase estimated ultimate recoveries by 25% and the rapid build-out of midstream infrastructure is being overlooked when it comes to considering the long-game of operators who have bet big on the Utica and Marcellus.
"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."
Better completion efficiencies will continue to drive up production in the Utica and Marcellus, Canaccord said. A number of companies, including Range Resources Corp., Antero Resources Corp., Consol Energy Inc. and Gulfport Energy Corp. have recently highlighted short stage lengths, reduced cluster spacing and better geosteering techniques in recent presentations and updates (see Shale Daily, July 15; July 16).
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, Canaccord said, 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). Canaccord 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, Canaccord 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.
Chalabala said producers working in other fields across the country will continue to present strong competition for those in Appalachia. But he added that some Utica and Marcellus operators, particularly those working in southwest Pennsylvania, southeast Ohio and West Virginia, stand a better chance to outperform their peer groups as infrastructure and production will be closer to growing markets in the Midwest and the Gulf Coast region.