A recovery in production and a surge in the gas benchmark price has pushed Southwest Appalachia basis prices lower.
Most of the weakness in the Dominion South Point (DomS) curve has been in the nearby shoulder months, which encompass the remainder of the Summer ’20 strip (Sep-Oct). Longer-dated seasonal strips have also weakened in response to higher Nymex pricing, consistent with the expectation that there would be more production in years 2021-2022.
DomS area pricing is very sensitive to seasonal consumption patterns, which are dependent on weather. A recent rebound of Appalachian production from the April bottom of 30 Bcf/d to 32.5 Bcf/d(shown in the Dry Gas Production chart) has put pressure on the DomS curve for the two months where the average temperature in the Northeast for September is 61.6°F and 48.7°F in October – lower demand.
Production Could Dip, but Recent Price Increases Support Output
The chart below shows how dry gas production has returned to near record-highs set last December. This has added some pressure Dom S in SW PA as gas is pricing lower to compete for limited demand. The chart on the right shows an estimate for future production growth based on well economics in the region. The first scenario (light blue area) reflects producer guidance (of those public companies which disclose their plans) until 2021. At that time, well economics determines the total production profile. In scenario two, the switch to well economics is started earlier, in September of this year, suggesting a deeper dip in production for 2021. AEGIS expects Appalachian production will likely be flatter than what a well-economics model would show. Future company guidance will likely be more constructive following the rise in Nymex recently, possibly leading to a flatter 2021 production curve than the one shown here.
Effects of Infrastructure Disruptions
A reduction in southbound takeaway capacity has added pressure to near-term SW Appalachia pricing. An explosion on Texas Eastern (TETCO), an outbound pipeline, on May 9, 2020 reduced flows south out of Appalachia, pulling regional prices down. Flows on TETCO’s southern leg have partially returned to an operational capacity of about 1 Bcf/d, but the pipe typically flows nearly 2 Bcf/d down to high-demand markets on the Gulf Coast. The reduction in pipe capacity puts a strain on DomS and other Appalachia prices when local demand is lower, and gas needs to flow south to find other markets.