For the world-class and world-changing natural gas industry in Appalachia, hostile markets are problem enough. A hostile neighbor just adds irritation.
Measured by output and consequence, the industry growing rapidly around production from the Marcellus and Utica shales represents thundering success. Production from the region has lept to 33 bcfd from 1.4 bcfd in 2007. The US Energy Information Administration expects Marcellus and Utica gas to account for more than half an expected surge in total US gas production to nearly 120 bcfd in 2050 from 75 bcfd in 2017. New Appalachian production has reversed gas flows in the US and Canada, fostered the development and rapid growth of US LNG exports, supplanted coal in wealth generation from natural resources, and laid the foundation for a regional petrochemical industry. And it all happened in about a decade because of hydraulic fracturing of horizontal wells and steady improvement to the technology.
Punished success
In a commodity business, though, volumetric success seldom goes unpunished. Appalachian operators, some of whom are stuck with long-term supply commitments, produce too much gas. Prices are tumbling. In the 3 weeks before Oct. 4, according to EIA, prices fell to 76¢/MMbtu at the Dominion South hub in southwestern Pennsylvania and to 65¢/MMbtu at the Tennessee Zone 4 Marcellus hub in the northeastern part of the state, both down from about $2/MMbtu in mid-September. And the normal discount to the Henry Hub marker on the US Gulf Coast is widening. During spring and summer, discounts averaged 20¢/MMbtu at Dominion South and 50¢/MMbtu at Tennessee Zone 4 Marcellus. The spread at both hubs widened to 83¢/MMbtu in September and to $1.59/MMbtu Oct. 4. Drilling, therefore, is declining. Operators are announcing spending cuts.
EIA notes that the low prices, punishing as they are to producers, help Appalachian gas push into the Midwest via the Rover and Rockies Express pipelines and onward to the Gulf Coast. Those flows increased with an Aug. 1 explosion on the Texas Eastern Transmission pipeline but remained strong after the damaged system partly resumed service. For the distressed producers who so quickly have changed so much of the gas industry, of course, market penetration via price advantage offers little consolation.
At least supply from Pennsylvania, Ohio, and West Virginia faces no competition from New York. The Marcellus shale extends into the Empire State, but the government there bans hydraulic fracturing. It thus sacrifices jobs, incomes, and state and local revenues to fears about possible environmental harm from the completion method and about emissions of greenhouse gases.
Albany won’t even accommodate gas from states more welcoming to hydraulic fracturing—and the jobs, incomes, and state and local revenues that accompany the work. New York regulators have stalled or stymied several federally approved pipeline projects by denying water permits. Lacking needed gas supply, utilities in fast-growing areas in and around New York City have cancelled hook-ups. And the green righteousness affects neighboring states that could use the gas not transiting New York through disallowed pipelines. The New England Independent System Operator has issued warnings about wintertime power disruptions related to deficiencies in natural gas infrastructure.
New Yorkers and New Englanders pay for resistance to resource development and pipelines in several ways. They pay higher rates for gas and electricity than they would if gas were allowed to flow to where it’s needed. Where construction is blocked in hook-up moratorium areas, building space is pricier than it otherwise would be. And New Yorkers pay higher taxes because of their state’s aversion to hydraulic fracturing.
Different problems
In Appalachian states more hospitable to the production and use of natural gas, problems are different, starting with those abysmal gas prices and extending to the tendency of state houses that, once enriched by production-related revenues, want more.
The gas industry indeed has much to fret over inside Pennsylvania, Ohio, and West Virginia. But New York offers a soothing reminder: Things can always be worse.
