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The Haynesville Rig Decline is Finally Here

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Natural Gas Weekly: May 19, 2023

Rigs -  Rigs drilling in the Haynesville shale fell by 11% last week, breaking an otherwise steady pace of activity in 2023. East Daley has been calling for Haynesville rig counts to decline every month in 2023 to help rebalance an oversupplied natural gas market, but rigs have remained more resilient than we had anticipated. However, the recent pullback is moving rig counts in Louisiana and East Texas more in line with the trend in our ArkLaTex Supply and Demand Forecast. 

Chesapeake Energy (CHK) and Southwestern Energy (SWN) seem to be executing on a slow plan to reduce rigs this year, with recent declines occurring in De Soto Parish, LA. Even private operator Aethon is starting to curtail rigs. Gas prices near $2/MMBtu have picked up power generation demand and allowed Haynesville operators to maintain higher drilling levels without causing a catastrophic imbalance in the market, as suggested in our models at the start of the year.  

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Flows - Pipeline flows in the ArkLaTex Basin (Haynesville) are averaging a record high of 13.88 Bcf/d so far in May 2023, according to samples tracked by East Daley. Our unconstrained Macro Supply and Demand Forecast shows steady near-term growth in Haynesville gas production, driven by an average of 76 rigs active in 1Q23. Samples to date in May are ~390 MMcf/d higher M-o-M vs the April 2023 average of 13.49 Bcf/d.   

We believe the growth suggested by the May samples is legitimate. Daily pipeline samples in East Texas and northern Louisiana capture around 70% of Haynesville gas production, providing a good benchmark for supply trends in the basin.  Nevertheless, the midstream sector in the ArkLaTex is complex, and regional pipeline flows can be misleading indicators when taken out of context. As a case in point, ArkLaTex samples declined in March, when our Macro Supply and Demand Forecast is predicting growth. We believe the restart of the Freeport LNG facility at the time altered flow patterns in basin samples, creating a distorted view of supply trends.  We shall see when final production data is released, but for now we stand by our Macro outlook for growth. 

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Infrastructure - The Biden administration has approved a permit allowing Mountain Valley Pipeline (MVP) to run through the Jefferson National Forest straddling Virginia and West Virginia. The decision by the US Forest Service allows lead sponsor Equitrans Midstream (ETRN) to build MVP through 3.5 miles of the Jefferson National Forest. The news is welcome for MVP, which has ridden a roller coaster of legal victories and setbacks recently. The biggest near-term issue for MVP is a challenge to water-crossing permits issued by West Virginia state regulators.

ETRN continues to target a YE23 start-up date for the 2.0 Bcf/d project, but we anticipate MVP's legal challenges require more time. In the Northeast Supply and Demand Forecast, East Daley models MVP start-up in 4Q24. With Northeast production trending flat, our Northeast dry gas egress stack currently shows spare near-term egress capacity for Marcellus and Utica producers, even if MVP were never built. However, more pipeline capacity will be needed when LNG demand begins to ramp post-2026.  

Storage - EIA reported a 99 Bcf storage injection for the May 12 week, putting working gas inventory at 2,240 Bcf. In our updated Macro Supply and Demand Forecast, we estimate working gas ends May at 2,652 Bcf. US storage is 340 Bcf above the 5-year average after the latest EIA report.

Natural Gas Weekly

East Daley Analytics' Natural Gas Weekly provides a weekly update to our monthly Macro Supply and Demand Forecast. The update covers rigs, flows, production, prices and capacity constraints that materially change our view on supply and demand. This update highlights what investors and traders need to monitor in natural gas to ensure they are on the right side of the market. Subscribe to the Natural Gas Weekly.

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