Southwestern Energy Company (SWN)

[dwms07]

Marcellus Infrastructure Constraints to Hold Back Production!

(Will this slow SWN?)


Volumes in the Marcellus and Utica have recently flattened, driven by a shortage of pipeline capacity across the Northeast U.S. In addition to limiting new drilling activity, infrastructure constraints have led to significant curtailments over the past several months as operators choke back existing production due to unfavorable regional prices.

Since the start of 2015, the top 10 operators (which collectively account for around 75% of statewide volumes) have curtailed approximately 2 bcf/d of natural gas production in the Pennsylvania Marcellus, with curtailments tending to move in line with regional prices. The implication: Significant volumes can be brought on line once new pipelines and/or an improvement in prices come about.

Since April, Northeast U.S. pipeline projects totaling more than 5 bcf/d of capacity have had their in-service dates pushed back between 6 and 24 months or canceled altogether, driven largely by delays in permitting and/or a lack of customer demand. As a result, we have tempered our near-term Marcellus and Utica production forecasts, with volumes now ramping gradually throughout 2017 as new capacity is added. As long as the Marcellus and Utica are short pipeline capacity, there will is likely to be continued pressure on prices in this region. Beyond 2017, however, there should be sufficient capacity to move volumes to market without a significant haircut to prices. We note, however, that regulatory delays remain a risk to watch.

As Infrastructure Catches Up, Marcellus and Utica Set to Grow Again
We developed our Three P’s framework--productivity, pipelines, and potential resource--as a way to assess how big the Marcellus and Utica could ultimately get (and by extension, how likely they are to crowd out natural gas supply from other regions). Despite the potential for transitory pipeline delays, the other elements of our framework support our thesis on the productive capacity of the Northeast U.S.: (1) There is sufficient low-cost resource in place across the Marcellus and Utica to meet 10-15 years of U.S. natural gas consumption (assuming all demand is met with Northeast U.S. supply) at $3 per mcf or less, and (2) the vast extent of these plays implies a relatively flat U.S. natural gas cost curve.

The Marcellus and Utica continue to set new high-water marks regarding initial production rates. Notably, the declines are shallow, with first-year decreases of approximately 30% compared with 70%-plus across other shale plays like the Haynesville. The combination of high IP rates and shallow declines has helped the Marcellus and Utica to continue increasing production volumes even as rig counts have fallen precipitously.

In our base-case production forecast for the Northeast U.S., we expect dry gas volumes in the Marcellus to increase from 17 bcf/d at year-end 2015 to more than 27 bcf/d by year-end 2020, with the Utica going from around 2.4 bcf/d to 4.5 bcf/d over the same period. Combined, we expect the Marcellus and Utica to deliver an incremental 13 bcf/d of dry gas volumes through the end of the decade, growing at an 11% compound annual rate from 2015 to 2020.

Given the high number of drilled but uncompleted wells, or DUCs, across the Marcellus and Utica--along with the increasing productivity of new wells--rig activity in the Northeast U.S. is unlikely to ramp back up to historical levels (the Marcellus peaked at 140 rigs; the Utica at 45 or so). Still, we believe the Marcellus and Utica can reach a combined dry gas production level of more than 32 bcf/d by the end of 2020, averaging just 45 rigs for the next five years (thanks, in part, to the 1,200 or so DUCs we project will be brought on line through mid-2019).

http://news.morningstar.com/articlenet/article.aspx?id=786427