Reason #2471 Why I Like To Blog -- Natural Gas Fill Rate -- Zeits

It all started with a short note from Don some months ago; since then I have enjoyed following the "NG fill rate." The link takes you to an earlier post to provide the background; I have a tag at the bottom of the blog, "NG_Fill_Rate."

The subject was a spin-off from "The Road to New England," another tag at the bottom of the blog.

Now that I have a better picture / worldview / feeling for the natural gas fill rate, I can enjoy Richard Zeit's analysis over at Seeking Alpha. A year ago I would have skipped over this article. In fact, I almost skipped over this article until I saw it was written by Zeits. His summary:

• Natural gas supply and demand appear well-balanced, lending support to the Henry Hub stability thesis at ~$4/MMBtu.
• New takeaway capacity schedule in the Northeast Region defines the trajectory of natural gas supply, and is the key driver to monitor.
• Chesapeake sees no relief to the Marcellus North constrained situation in 2015, with gradual relief in 2016-2017. 

Other data points:

The storage deficit versus the 5-year average went from ~900 Bcf at the beginning of the injection season to ~373 Bcf currently. Goes without saying, neither figure should be interpreted as a measure or indication of imbalance between supply and demand, but rather, as a reflection of abnormal weather pattern: the initial deficit was the consequence of the severe winter, and the strong contraction of that deficit is in large part explained by the abnormally cool summer.

The most recent storage injection data provides evidence that supply and demand are in fact in almost a "goldilocks" balance. While storage injections are running at a rate that exceeds the five-year weather-adjusted average, this excess supply is hardly a threat to the Henry Hub price.

First, this surplus is moderate, while storage capacity remains ample, particularly in the producing region.

Second, current injection rate excess over the five-year average is somewhat overstated by weekly headline figures, due to the fact that available storage capacity is more broadly distributed at the moment, relative to what would be a seasonal norm. At the end of a typical injection season, when capacity is near full, some injection points begin to experience congestion, leading to a slowdown in the injection rate. That point has not been reached during this injection season yet.

Folks may want to save this article in another format than simple bookmarking; these articles have a way of disappearing after awhile, requiring a subscription.

By the way, I have said the same thing with regard to Canadian oil sands and the Bakken; a takeaway constraint is not necessarily bad for investors.

It may take some time before the severe constraints can be relieved. The Marcellus North region is particularly constrained. Chesapeake Energy presenting at an industry conference yesterday, made the following comment on the pricing outlook for the Marcellus North:

The pipe access in the Northeast is a challenge. There is a lot of pipes under construction and more in the planning stages. We have an active discussion with all of those pipes, trying to figure out where the best access to markets are going to be, what the best cost structure is going to be. You can map it out and see that there is not a whole lot to expect in terms of huge improvement in 2015. There is more to see in 2016 and then even more in 2017. So, when I think about the basis issue in the Northeast, I do not expect 2015 from a pricing standpoint to be really any better than 2014 and we are planning our business accordingly, that's why we like to keep production flat.

Of note, Chesapeake mentioned that it only needs to run 3-4 operated rigs to maintain its gas production in the Marcellus North flat. This is substantially lower than the 5 rigs/$300 million net maintenance capital estimate that Chesapeake provided earlier year. Chesapeake's net production in the Marcellus North during Q2 2014 was ~0.9 Bcf/d. The company's gross operated production is much higher, at ~2.2 Bcf/d. 3-4 rigs maintaining 2.2 Bcf/d of production flat - this is a truly impressive metric.

The remarkably low rig requirement to keep production flat is a testament to the productive capacity of the Marcellus' sweet spots and shallow production declines from the existing wells after operators put them on restricted choke programs. With Utica demonstrating equally strong productive potential in the dry gas area, production deliverability from the region is very powerful.