The Appalachian region has suffered several delays and cancellations of pipelines during the past year, raising questions around further growth prospects from the largest gas basin in the US. The latest obstacle came on 5 July 2020, when Dominion Energy and Duke Energy announced that they will cancel the Atlantic Coast Pipeline (APC) as a result of the increasing legal uncertainty of the project. Dominion Energy, one of the largest utilities in America, also announced that it will sell its natural gas transmission business to Berkshire Hathaway and shift focus towards cleaner energy.
In our previous update in January, we reported that APC, first announced in 2014, would see its start date yet again pushed back, from 2020 to 2021. The pipeline project has long faced legal fights and pushback from environmentalists and locals, in addition to several setbacks in court. In mid-March 2020, a federal judge sided with the pipeline company in a dispute of permitting powers with local governments, and the start-up was then moved to 2022. However, despite the latest win in court, Dominion Energy and Duke Energy decided that the uncertainty around the project was too high, APC was meant to start in West Virginia and end in North Carolina, and with a capacity of 1.5 billion cubic feet per day (Bcfd), it was among the largest upcoming pipeline projects in the Appalachian region.
Figure 1 shows the main pipeline projects sending gas out from PA, WV and OH, along with Rystad Energy’s regional production base case. Since our previous update on takeaway capacity, several pipelines in addition to APC have either been delayed or cancelled. The Mountain Valley Pipeline (MVP) has been postponed from mid-2020 to 1 January 2021. With capacity of 2 Bcfd, the project is the largest upcoming pipeline project in the region. The Constitution pipeline, with an initial start-up date in 2022 and capacity of 0.65 Bcfd was cancelled in late February, despite receiving positive outcomes in recent court proceedings and permit applications. PennEast Pipeline Company has now applied to construct the federally-approved PennEast Pipeline project in two phases. The first phase will run entirely within Pennsylvania and will be ready by November 2021. Phase two will include the remaining route from Pennsylvania to New Jersey, with targeted completion in 2023. Although MVP, which was the main contributor to added capacity in 2020, is delayed, there are a few smaller pipelines under construction. The Buckeye Xpress and Empire North Expansion projects are both under construction, and together will add capacity of 0.575 Bcfd. Despite the cancelled and delayed pipelines, there are currently no arising bottlenecks in sight, much since production growth from the region is expected to slow down in the next couple of years as a result of the current depressed gas price environment.
The end of 2019 and beginning of 2020 was a period of record low gas prices, and the prices have remained low so far during the first half of 2020. Figure 2 shows the monthly Henry Hub gas price strip from 2016 until May 2020. From the figure it is observed that the prices in 2020 are quite like 2016 although slightly lower during most months so far in 2020. Also, while the prices in 2016 increased quite a bit in June, we don’t see the same this year. In fact, the June gas price is at a record low. With the depressed prices during the start of the year, many of the largest operators reported that they would enter maintenance mode, i.e. keep production flat from 2019 levels. Despite the continuation in low prices, we have yet to see the major gas players revise guidance down further, as many of them are well-hedged for 2020.
The production in most sub-basins in the Northeast region has been exceptionally resilient so far in 2020. Despite a substantial slowdown in frac activity, we are yet to see material implications for basin-wide gas output in 2H20. Relatively flat development after a modest decline from the peak levels was observed in NE Pennsylvania and the dry gas zone of Utica, while production in the southwestern part of the Marcellus has not really declined from peak levels at all. Hence, modest basin-wide deceleration in output was primarily driven by non-core sub-basins which saw a decline of almost 500 million cubic feet per day (Cfpd) throughout 1H20. As of 2Q20, Appalachian gross gas output still exhibits year-over-year growth of more than 2 billion Cfpd, yet this growth is likely to diminish quickly in 2H20.
Figure 4 shows Rystad Energy’s base case and forward case Henry Hub price strip until 2025 and the corresponding production based on these price assumptions. The base case production represents our unconstrained view on the potential from the basin. In real terms, Rystad Energy currently expects the 2020 price to drop down to $1.9 per MMBtu from 2019, before we see a recovery in prices over the next years to $3.2 per MMBtu in 2025. In a price scenario below $2.5 per MMBtu we do not think Appalachia will be able to maintain the production. In our base case view, we expect production to remain relatively flat from 2019 to 2020, before production starts growing again. However, under the latest strip pricing, we expect production from the northeast to gradually decline from 2022. Nevertheless, the longer we stay in the low oil price environment, the more likely there will be an upcycle for gas prices to trigger more growth both from Appalachian and Haynesville.