Natural Gas Supply Curves - Microeconomics 101
A key variable in trying to anticipate future pricing of natural gas is the expected supply increases coming from production in North American basins. Of particular interest to many of LawIQ's subscribers is the Marcellus/Utica formation. However, supply is only one part of the equation. The other key variable is how the pipeline capacity from the basin is anticipated to grow to match the increasing supply. As the producers in the Marcellus/Utica basin can attest, if the supply outpaces the pipeline takeaway capacity, the pricing in the basin can plummet. Based on our analysis, there are three primary takeaways.
1. Most developers believe they are above average.
2. Based on historical comparisons, additional gas infrastructure takeaway capacity is most likely to be slower than many market participants expect.
3. If most of the projects end up being in the lowest 25%, it could be a tough couple of years in the basin, unless production ramp ups are slowed to match the anticipated buildout.
By combining the LawIQ statistical models for the various projects shipping from a particular basin, our subscribers are able to quickly assess how takeaway capacity may grow under different scenarios, which often varies from estimates based on the project developers' proposed in-service dates. We've discussed the numerous regulatory permitting, litigation and other variables that impact these estimates.
- For producers, a basin-based outlook influences their hedging and production plans.
- For commodity traders, the basin-based outlook presents trading opportunities.
- For project developers, the basin-based outlook influences their proposed growth projects.
During the past few months, a number of projects have gone into service providing takeaway capacity for the Marcellus/Utica basin. But there are still over 17Bcf of projects that have yet to come online and which are somewhere in the FERC permitting process, from filing to in-service. That number does not include either the Constitution project or National Fuel's 2016 Northern Access project, both of which are being stymied by the New York State Department of Environmental Conservation's review of their projects under section 401 of the Clean Water Act.
Projects Placed In-Service in 2017/4Q
| Project Name | Capacity (MMcf/d) | In-Service Order |
|---|---|---|
| Orion Project | 135 | 11/30/17 |
| Virginia Southside Expansion Project II | 250 | 11/27/17 |
| Access South, Adair Southwest, and Lebanon Extension Projects | 622 | 11/20/17 |
| Collierville Expansion Project | 200 | 11/14/17 |
| Connecticut Expansion Project | 72.1 | 11/9/17 |
| Triad Expansion Project | 180 | 10/31/17 |
| New Market Project | 112 | 10/27/17 |
| Northern Lights Expansion Project | 75.9 | 10/26/17 |
There were also 17 projects outside of the Marcellus/Utica basin that aimed to be in-service for this year's heating season, but did not meet company estimated in-service dates.
Supply Scenarios
The chart below shows how the takeaway capacity would build over time if all of the project developers were able to be placed in-service by their original proposed in-service dates.
Company Targeted In-Service
The following chart compares the buildup from the chart above to the buildup that would occur if all of these projects were high performing projects according to LawIQ's statistical models:
Projected Capacity (25th Percentile)
This chart compares the buildup from the first chart to the buildup that would occur if all of these projects were median performers under LawIQ's statistical models:
Projected Capacity (Median)
This chart compares the buildup from the first chart to the buildup that would occur if all of these projects were poor performing projects under LawIQ's statistical models:
Projected Capacity (75th Percentile)
