Appalachian dry gas pricing and midstream

For landowners, the later that their contracted E & P company drills, the better as Appalachian Natural Gas price differentials will be wide by our estimations through early 2016.  What is needed, and is in the process of build out, is more infrastructure and midstream assets to move the material to the most robust demand centers (read the Gulf Coast).  Over $300B of midstream and downstream infrastructure is needed to be built over the next 10 years according to the EIA to move the massive new supplies of hydrocarbons.  The LA/MS LNG facilities (delivery dates 2016/2017) will be extremely beneficial to the exploration companies as robust demand centers which should bolster multiple basin pricings given that the highest prices can be achieved once its portable and exportable.  Please note in Europe and in parts of Asia, natural gas on a BTU basis sells for 3-4X of domestic. But through early 2016 market dynamics are such that  production growth is outstripping increased transport capacity.  Thus too much gas has been -and may continue to gather in the northeast with local producers unfortunately suffering discounts of $1.00 to almost $2.00 more than Henry Hub pricing.

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Permalink Reply by Dexter Green on September 26, 2014 at 3:24pm

Patrick,

Do you see a further decline in the rig count for dry gas well in the Appalachian Basin in the go forward?  I know the differentials are killing some companies (COG is the worst victim) but do you see some of the more diversified players shifting rigs out and decelerating their pad drilling plans and instead shifting to single-well HBP drilling until the discount is decreased?

Permalink Reply by Patrick Donnelly on September 27, 2014 at 1:54am

Phil and I have had great previous discussions, please reference his other posts. For more input and more granularity.

I just had lunch yesterday  with a good friend and portfolio manager running a multibillion energy investment fund.  He invests in all segments of the energy complex and is very bullish on the nat gas E & P and the midstream companies geared towards moving the material over the next 3-5 years.  But he gave me hard number projections and unless something changes, the nat gas supply in the northeast (dry Appalachian nat gas) will remain in oversupply for the next 18 mos or so, just based on the production curve and the capacity to transport which is very visible and the lead times of new capacity long in duration but again predictable. 

Ive distributed a few reports via email.  Please let me know if interested: Im at Patrick.F.Donnelly@morganstanley.com

Permalink Reply by Jack Straw on September 26, 2014 at 5:39pm

RE: "For landowners, the later that their contracted E & P company drills, the better as Appalachian Natural Gas price differentials will be wide by our estimations through early 2016."

Patrick,

You are telling people what THEY DO NOT WANT TO HEAR; but, you are telling them what they need to hear.

Patience, will bring its own rewards.

In my opinion (and it is just that, an opinion), I believe that in may be 2018 or 2019 before infrastructure and demand catches up with production.

If one can hold out, I hate to see the 'flush gas' of the first year or two of production sell at a deep discount to the value I perceive to be present in the future.

All IMHO,

                   JS

Permalink Reply by paleface on September 26, 2014 at 11:22pm

 We can't sell this amount of gas to ourselves we have to export.

Permalink Reply by Jack Straw on September 27, 2014 at 4:27pm

RE: "We can't sell this amount of gas to ourselves we have to export."

Because of NAFTA, we can and will export Natural Gas to Eastern Canada (Ontario and points east) and to Mexico. Eastern Canada needs the Natural Gas; they are currently having trouble filling storage (we had a cold winter 2013/2014 ... they had a very cold winter 2013/2014). Mexico want the CHEAP and plentiful U.S. Natural Gas .... to displace Mexico's more valuable Oil .... oil that they can otherwise profitably export to the U.S. Gulf Coast refineries that are configured to refine the heavy crudes from Mexico and Venezuela. The crudes from Mexico and Venezuela have been in short supply due to declining Mexican production and due to both declining Venezuelan production and the politics in Venezuela sending more of their oil to China (in payment for loans) and Cuba (in exchange for Cuban Doctors and Nurses).

Exports to other countries will doubtless become  embroiled in politics and the respective influences of competing lobbyists. 

I expect significant exports to occur ... but, I expect that these will ramp up slowly .... like much else, dependent upon the creation of the necessary infrastructure (and the associated and necessary regulatory permits and approvals). Creation of infrastructure (increasingly) takes a lot of time.

Right now, much of Eastern Europe are doubtless fearing the arrival of their nasty continental winter (winters that in the past have defeated Napoleon Bonaparte and Adolph Hitler); but, even if we wanted to, we could not ramp up the capability to export LNG to them in time to help them with a potential impending need ... and they do not currently have the capability to import and re-gasify LNG.

All IMHO,

                    JS

Permalink Reply by Philip Thackray on September 27, 2014 at 12:57am

Jack,

I said the same thing in Patrick's other discussion of the same title.  The oversupply and infrastructure problems won't end in two years.

But NE PA gas is dry and may find a home in an Easterly direction.  The wet gas here in Western PA and Eastern Ohio will need to get to the Gulf Coast.  There was a great couple of articles last week on Propylene plants at RBNenergy.com .  Propylene plants are to (on purpose) propane what ethane crackers are to (on purpose) ethane and there are some serious Propylene plants being planned for the Gulf Coast region and one in Canada.

Phil 

Permalink Reply by Patrick Donnelly on September 27, 2014 at 1:55am

Phil and I have had great previous discussions, please reference his other posts. For more input and more granularity.

I just had lunch yesterday  with a good friend and portfolio manager running a multibillion energy investment fund.  He invests in all segments of the energy complex and is very bullish on the nat gas E & P and the midstream companies geared towards moving the material over the next 3-5 years.  But he gave me hard number projections and unless something changes, the nat gas supply in the northeast (dry Appalachian nat gas) will remain in oversupply for the next 18 mos or so, just based on the production curve and the capacity to transport which is very visible and the lead times of new capacity long in duration but again predictable. 

Ive distributed a few reports via email.  Please let me know if interested: Im at Patrick.F.Donnelly@morganstanley.com

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