| | | The Battle for Henry Hub – Ominous Implications of Natural Gas Oversupply
published by Rusty Braziel on Sun, 11/02/2014 - 20:00
There is an onslaught of surplus natural gas supply bearing down on the Henry Hub in South Louisiana. More than 60 natural gas pipeline projects are in the process of reversing the continent's gas flows to move gas out of the Northeast, and much of that production will be moved to the Gulf Coast. That gas will slam into supplies moving in to Louisiana from the west, sourced from “wet” gas and associated gas from crude oil plays in TX, NM, OK and ND. Demand from gas fired power generation, industrial gas use and LNG exports will eventually absorb the incremental supply, but not for a few years. We’ve seen this movie before, in the 2008-10 timeframe when Rockies gas battled it out with new shale supplies from the Haynesville and Fayetteville. But this time there is a big difference in the economics of production. Today we summarize the conclusions from a new deep-dive report from RBN Energy and BTU Analytics.
Obsessing about Gas Flow Reversals
This is a topic we’ve been obsessing about for years. But now the fog has started to lift, and the magnitude of the problem is becoming visible. One of our first blog series on this topic was two and one-half years ago titled The Marcellus Changes Everything. The point then was the onslaught of natural gas production out of the Marcellus changed everything in the Northeast, and by default, the direction of gas flows across the country. We followed up with Get Back to Where You Once Belonged and Return to Sender. As the Polar Vortex shook things up in the Northeast last winter, we also reviewed the implications for natural gas supplies from the Marcellus/Utica moving to New England in Please Come to Boston(including Part 2), and into New York in Another Gassy Day in New York City. This summer we did another whole series on the subject of pipelines reversing out of the Marcellus/Utica plays in They Long to Be Close to You—The Marcellus/Utica Push to Reverse Gas Pipelines.
We wrapped up that analysis by examining the only market that could possibly absorb all of that gas in (South) Eastbound and Down: The Southeast—Emerging Demand Epicenter of US Gas Industry. But we did not talk about when that demand might materialize, what will happen in the interim, and most importantly – what kind of competition that Northeast gas might see from prolific gas producing plays to the west of Louisiana. It turns out that these issues have the potential to wreak more havoc in the natural gas market than we’ve seen in years.
The Battle is Coming to Henry
The point of all of those earlier blogs was that the entire natural gas market in North America is being upended, with scores of proposed pipeline projects being developed to reverse the continent’s gas flows. The ultimate goal for most of these projects is to transport (or displace) surplus Marcellus/Utica production to the Gulf Coast to meet the anticipated demand growth from gas fired power generation, new industrial plants, and of course, most of the U.S.’s impending LNG exports. That onslaught of gas supply is aimed directly at the Henry Hub, price reference point for essentially all natural gas in North America. This is not the first time in recent memory that the Henry Hub has been inundated with natural gas surpluses.
In 2008-10, the newly completed Rockies Express (REX) pipeline into Ohio displaced gas from Louisiana and Texas with cheap and abundant Rockies production. At the same time, pipelines from the growing Haynesville and Fayetteville shale plays elbowed their way into the Southeast/Gulf market. The convergence of those surpluses crushed the Henry Hub price, resulting in significant ramifications for the gas market across North America, and, by obliterating the need for LNG imports, ultimately, global natural gas markets.
Now history is repeating itself. Those same market dynamics are headed toward the Southeast/Gulf, beginning in 2015-16. But this time there is an important difference in the economic profile of those surplus supplies. In that earlier battle for market share, the opponents (Rockies gas versus Southeast gas) were armed with breakeven prices in the $4 to $5/MMbtu range. Most of the production was dry, and producers had yet to realize the significant productivity improvements in drilling and completion technologies seen over the past five years. (For more on those productivity improvements, see Higher and Higher – Drilling Rig Productivity in the Marcellus.)
Today the opponents are Northeast gas versus gas from Texas, New Mexico, Oklahoma and North Dakota. And the productivity arms race has changed the battle plan. Many producers in Northeast Pennsylvania can profitably produce gas at prices less than $2.50/MMbtu. Many wet (high BTU, high NGL content) gas producers in Southwest Pennsylvania, West Virginia and Ohio can operate profitably at prices well below $2.00/MMbtu by selling higher value NGLs (even at today’s lower NGL prices). Those supplies will be duking it out with producers of associated gas from the Bakken, the Permian, the Anadarko and the Eagle Ford, who are making most of their money on the sale of crude oil and condensate, meaning that they are essentially immune to the impact of low natural gas prices – down to a breakeven price of zero! (We did a detailed review of Permian producer economics in Stacked Deck: Why Producers Like Their Odds in the Permian.)
The implications are both stark and unambiguous. Natural gas surpluses will be battling it out for market share in and around the Henry Hub, armed with economics far more powerful than those earlier skirmishes in 2008-10. Can a $4.00/MMbtu Henry Hub forward curve survive combat at this level? From the vantage point of November 2014, it seems unlikely. Only demand could provide a reprieve and that looks dicey, at least in the medium term. The infrastructure development required for significant demand growth is years away and must navigate a minefield of permits, local logistics, complex offtake agreements and the ever-present risk of construction delays.
The Battle for Henry Hub Report
To help navigate the upcoming melee, RBN Energy and BTU Analytics have joined together to provide a detailed analysis of the market developments leading up to the battle, an assessment of the risks that are emerging from these dynamics, and recommendations for those involved in the North America natural gas markets. RBN has a long history with the team at BTU Analytics, an energy consultancy based in Denver. We’ve worked together on several natural gas market consulting projects recently, and concluded that the development of a joint report project to crunch the numbers, analyze the data and create a report of the results was something that needed to happen quickly and accurately. So to accomplish that goal we agreed to develop the report The Battle for Henry Hub as a joint venture.
Because it is a joint venture report, it is not included with RBN’s Backstage Pass service. It is a separate report which can be purchased from either RBN or BTU. For more information on purchasing the report from RBN, click here.
| N E W R E P O R T ! ! Battle for Henry Hub
Examines the impact of huge surpluses of natural gas bearing down on the Henry Hub in South Louisiana from Marcellus/Utica in the east and supplies from the west sourced from high-BTU and associated gas from plays in TX, NM, OK and ND
More information about Battle for Henry Hub here.
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The Battle for Henry Hub report is 65 pages long, includes numerous tables, graphics and maps, and integrates production forecasts, natural gas flow/capacity analysis, an assessment of forward price developments and conclusions. The report is organized into five sections:
Section I – The Thesis is an overview of basic concepts addressed in the report: (1) natural gas production growth is accelerating, (2) new pipeline projects are being developed to move this gas to market – with by far the most volume moving to the Gulf Coast; (3) in the medium term there will not be enough demand growth to absorb all of the increasing supply; (4) the oversupply scenario is similar to market developments in the 2008-10 timeframe when a combination of Rockies gas competing with new shale plays drove natural gas prices down to the $4.00/MMbtu range; (5) but a key difference in the market dynamics of 2014-16 is a much lower level of breakeven prices for dry, wet and associated gas; (6) consequently, the overall level of U.S. natural gas prices will be under even greater pressure until incremental demand, mostly along the Gulf Coast region, rebalances the market; (7) until then, natural gas prices will be buffeted by oversupply, huge flow shifts as new pipeline projects start up, and sudden leaps in demand as LNG export terminals, industrial facilities, and power plants come online.
Section II – Production explores the outlook for U.S natural gas production volumes and current production economics (rates of return and break-even prices). Production forecasts are segmented by major geographic sector, including Northeast, Rockies, Bakken, Oklahoma, Texas/Permian, and other regions. Producer economics are segmented by major play, based on various pricing scenarios.
Section III – Flow/Capacity examines current natural gas flow and capacity developments and demand projections, which sheds light on the magnitude of changes in flow patterns and where capacity constraints are likely to develop. This section catalogues all major pipeline projects that are expected to increase Northeast U.S. take-away capacity and describes the impact of that capacity on flows into the Southeast/Gulf region.
Section IV – Trends/Balances contrasts the developing market trends described in the previous three sections with similar market developments in the 2008-10 natural gas market when growing Rockies gas production competed for market share with the early shale plays, including Haynesville, Fayetteville and Barnett. At the time, it was expected that LNG imports would soon be competing in the same arena. This previous battle for Henry Hub is instructive in what can be expected in the upcoming conflict, both in its similarities and its differences versus current market conditions.
Section V – Supply/Demand Dynamics, Prices and Implications pulls together projections from RBN and BTU regarding supply/demand dynamics, an outlook for regional price basis, a review of risks to the pricing scenario, and recommendations for natural gas market participants.
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Iso, while the above is basically a sales pitch for their report it contains some good info in it and its hard to be a raging (or even a moderate) bull on natty after having read that, other than maybe for the next few months or so due to the cold weather being forecasted. Wondering what your thoughts are after reading this. Also, just curious -- how much of your acreage do you believe is likely to get drilled out in a LT sub-$4 natty price environment? |
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