Too Hot, Too Cold, or Just Right? Marcellus Takeaway Capacity

To understand where natural gas prices may go in the future, it is crucial to have a view into how production is expected to change in various basins. Nearly all commodities players forecast production growth daily. But knowledge of future production is simply one part of the equation necessary to understand regional supply-demand balances. To gain a complete picture, it is critical to know whether pipeline capacity from a region is expected to keep pace with increasing production. Rusty Braziel of RBN Energy LLC, has explained that the biggest variable, especially in the Marcellus/Utica basins, involves sensitivities surrounding project in-service dates: "Ultimately, the state of the Northeast market will come down to the timing of the expansion projects compared with the pace of production growth." Most analysts are expecting a mismatch between new capacity and production. But by how much, and by when?

Both buyers and sellers of natural gas must understand long range pricing because it influences their decisions about whether to lock in a long-term contract or hedge against price changes. When the gas produced in a region is unable to reach a liquid market, the price for that commodity suffers as supply far exceeds the demand centers that can be accessed due to a lack of pipeline capacity. Similarly, producers who may be considering becoming an anchor shipper on a proposed pipeline must understand the downside risks and upside potential related to how the proposed capacity will complement currently pending projects. For major new capacity, projections of the in-service date can allow short-term buyers of the commodity to better anticipate price movements that can result from changes in the market's expectation of the date the new capacity becomes available. Put simply, there's a lot riding on accurately forecasting the in-service date.

With so much on the line, utilizing static company-provided in-service dates is not sufficient. Rather, analysts must provide predicted in-service dates for each project by evaluating comparable projects to determine how long they took to move through the various phases from filing to in-service -- no small feat. In fact, our platform breaks down the probabilities into quartiles for the time from application to full in-service. As discussed in A Black Box? Machine Learning to Combat Regulatory Uncertainty, on a daily basis our dynamic modeling incorporates, hundreds of company filings, regulatory requests, third party opposition, federal and state permits/certificates, and other necessary inputs to construct statistically-significant forecasts. Our regulatory event modeling teases out subtle patterns, so our customers can obtain a window into how and when takeaway capacity will impact a particular basin.

There are 36 FERC pipeline projects that are currently under review or under construction that are designed to take supply from the Marcellus/Utica formation in all directions. If these projects are delayed and production from the basin begins to exceed the capacity of pipelines that can take the production to demand centers, one could see a return to the days when prices in the basin were depressed because of the lack of pipeline takeaway capacity. Our data set, however, provides a more robust picture into the expected in-service dates for all takeaway projects, allowing for a more informed, accurate and differentiated view of the market in a particular supply basin.

Presented below are two charts showing how the takeaway capacity from the Marcellus/Utica basin grows over time by comparing the project sponsors' projected in-service date (which is the date used by most major commentators) to the projected in-service date based on the LawIQ modeling. The comparison to our median and high estimates for those same projects shows a significant disparity, especially in 2018, between the amount of increased capacity that may be available over the next few years.

Marcellus - Utica Projected Natural Gas Pipeline Capacity