Discount to Henry Hub narrows as Marcellus drillers ramp up to fill new pipes

By Bill Holland  snl.com  Thursday, January 28, 2016

While prices at Marcellus Shale hubs in the northeast U.S. are slightly higher after new takeaway capacity came online and the weather turned cold, the secondary effect of all the gas leaving Appalachia is a steep cut in average prices at the benchmark Henry Hub.

"The narrowing of the gap between prices at Northeast supply hubs and Henry Hub has more to do with the large increase in outflows from the Northeast toward the Southeast having the effect of actually weighing down Henry Hub prices rather than providing upward support for Northeast supply prices," Bentek Energy analyst Eric Brooks said Jan. 27.

The same producers that have long complained about a lack of capacity out of Appalachia opened up their taps to fill capacity on new lines and expansions, including Rockies Express Pipeline LLC's Zone 3 East-to-West, Texas Eastern Transmission LP's OPEN project and Transcontinental Gas Pipe Line Co. LLC's Leidy Southeast, Bentek found.

"While more takeaway should theoretically reduce constraints, what we saw instead was a ramping up of production to fill the new capacity, leaving existing constraints more or less in place. This has led to continued weak pricing in the Northeast production hubs," Brooks said.

Appalachian producers have had a backlog of wells choked back until more pipeline capacity to better markets opened up. Chesapeake Energy Corp., National Fuel Gas Co. and Cabot Oil & Gas Corp. all announced production shut-ins for their Pennsylvania wells in the second half of 2015.  Cabot's most recent disclosure, in its third-quarter 2015 earnings release, did not quantify the shut-in, but earlier in the year, the company said 500 MMcf/d was backed out of the market.

Chesapeake also has 500 MMcf/d of Marcellus production shut in. National Fuel Gas, the most profitable of the group in the third quarter, has had about 140 MMcf/d shut in for most of the year.

"These wells allow Marcellus production to ramp up quickly when new infrastructure comes online. According to Bentek estimates, from January 1 through January 20, natural gas production in the Northeast (which includes production from the Marcellus and Utica) was 17% higher than during the same period in 2015," the U.S. Energy Information Administration said in its Jan. 27 "Today in Energy" feature.

"The increased capacity made available by Northeast expansion projects over the past six months has no doubt helped producers move their gas out of the highly constrained region toward more premium price hubs," Brooks said. "The basis spread from the Northeast has certainly narrowed, but outright cash prices are actually doing worse now than they were prior to this new capacity coming online, largely due to the record-high production marks in the Northeast region."

Brooks found that prices in Tennessee Gas' Marcellus Zone 4 dropped 80 cents on average, from $1.74/MMBtu in December 2014 to 94 cents/MMBtu a year later. At the same time, the difference between the Marcellus and the Henry Hub still shrunk by 74 cents, from $1.65/MMBtu in December 2014 to 91 cents/MMBtu, on average, according to Bentek's analysis of pricing data from Platts.

"This main driver behind this divergence is really the significant downward pressure we've seen on Henry Hub pricing," Brooks said. "This is primarily the result of increased flows from the Northeast to the Southeast, as well as other factors such as high storage utilization and a warmer-than-normal winter so far."

Bentek, Platts and S&P Capital IQ + SNL are all owned by McGraw Hill Financial Inc.