Northeast gas production: are operators running out of steam?
After seven years of surging production growth, Northeast gas producers are starting to slow their output.
Now the largest gas-producing region in North America is facing a mismatch on takeaway economics. The supply growth that was once constrained by limited piping capacity slowed at the end of 2018, just as additional pipeline projects were ramping up.
The bearish outlook for Henry Hub futures prices exacerbates the problem. Henry Hub dropped by more than $0.40/mmbtu since 2017. Significant growth in associated supply such as Permian is weighing on the price outlook, which is forecast to trend even lower near term.
Northeast gas producers signed up for firm pipeline commitments that made economic sense when the basin was bottlenecked a few years back. Gas price movements have since dropped to a level that no longer justifies firm tariffs. Meanwhile, equity from the investment community is eroding as producers’ cash-generation performance comes under scrutiny.
Further supply growth in the northeast is more uncertain than ever, but there is still some chance for upside. The over-piped market opens up opportunity for improvement in regional basis – offsetting weakness from the Henry Hub benchmark. Enhancements to upstream productivity gains since 2016 will also give producers the chance to access a larger downstream market with less tariff obligation.
As the region remains over-piped in the near-term, spare capacity provides some headroom for supply growth. Strength in regional basis price will be the impetus for a return to gains in output, particularly for producers who are short takeaway capacity out of the Northeast.
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