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Appalachian Gas Price – A Basis for Hedging

A slew of pipelines commissioned at the end of 2018 connected prolific Appalachian gas to the broader markets, eradicating more than 10 years of constrained production and wide differentials. Until an explosion in August on TETCO’s 30-inch line eliminated 1.8 Bcf/d of southbound volumes, the US Northeast had ~2 Bcf/d of spare capacity out of the region. Northeast demand dropped ~1.7 Bcf/d since August, more than offsetting ~1.3 Bcf/d of restored TETCO capacity and further exacerbating the situation. Local hub differentials widened from ~$0.45/MMBtu to ~$1.10/MMBtu (Figure 1) in just two months.

FIGURE 1 | Dominion South Historical Differential 


This seasonal and circumstantial basis blow-out emphasizes the importance of operator hedges heading into 3Q19 earnings, though increased seasonal demand in November and December will likely provide some relief to Dominion South pricing.

Basis and NYMEX hedge volumes drop by ~10% and ~45% between 2019 and 2020, based on disclosures from the eight major public Appalachian operators (Figure 2). The 24-month NYMEX strip averaging ~$2.40/MMBtu leaves little opportunity for Appalachian operators to add additional 2020 hedges, exposing realizations to depressed market pricing. NYMEX hedge volumes fall an additional ~45% year over year to just 2 Bcf/d of NYMEX protection in 2022.

FIGURE 2 | Appalachia Hedged Volumes


Similarly, basis hedges provide little security heading into 2021 and 2022 as basis-protected volumes respectively drop by ~30% and ~40% year over year. The strength of in-basin realizations remain risked to any combination of pipe disruptions, basin constraints and seasonal demand changes. Operators will likely rely on generally lucrative, and increasingly scarce, firm transportation capacity in the absence of financial hedges to receive premium pricing. 

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