US gas acquisitions signal Gulf coast strategy shift

Chesapeake Energy's $2.2bn bid for Vine Energy is the latest bet by large US natural gas producers on the future of the US Gulf coast market, signaling a shift away from the pipeline-constrained northeast.

Chesapeake's planned acquisition of Vine will nearly triple the company's output from the Haynesville shale, a prolific gas-bearing formation underlying east Texas and northern Louisiana. The combined company will have 1.6 Bcf/d (45mn m³) of Haynesville production, all of which may eventually find a home on the nearby Gulf coast, Chesapeake said this week. Those supplies can feed industrial demand and US LNG export terminals.

The deal, which should close in the fourth quarter of this year, follows Southwestern Energy's $2.7bn bid for privately held Haynesville producer Indigo Natural Resources. Southwestern, an Appalachian producer, would gain a foothold in the Haynesville, diversifying its assets and increasing its access to Gulf coast markets. That deal was expected to close later this month.

Those transactions underscore a renewed interest in the Haynesville as Nymex prompt-month gas prices rebounded from last year's lows and exports of US LNG surged. It also highlights the long-running frustration with regulators in the northeastern US — home to the Marcellus shale, the largest US gas field by volume.

"The next strategic move for US gas [producers] is on the Gulf coast," said Scott Hanold, an analyst for RBC Capital Markets. The region has more robust pricing, plentiful pipeline capacity and less regulatory friction, he noted.

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The appetite for natural gas along the US Gulf coast is growing as economic activity rebounds from the depths of the Covid-19 pandemic. The sharp increase in gas prices this year was driven in part by exports of US LNG, most of which leaves from the Gulf.

Prompt-month natural gas prices rose above $4/mmBtu this summer, the highest in more than two years, after languishing below $2/mmBtu.

US LNG exports hit record highs during the first half of this year as cold weather boosted demand in Asia and Europe and restrictions aimed at slowing the spread of Covid-19 eased.LNG exports averaged 9.6 Bcf/d during the first six months of 2021, up by 42pc from the same period in 2020, according to the US Department of Energy.

In contrast, demand for Appalachian gas wanes outside of the winter months because of mild weather. Spot natural gas pries on Columbia Gulf Mainline, an indicator for the price of Haynesville output, so far this month has traded at an average price of $3.78/mmBtu, or about a 20¢/mmBtu premium to gas on Transcontinental Gas' Leidy Line, a bellwether for Marcellus output in northeast Pennsylvania. Prices in the northeast received a boost this summer from low US gas inventories and regional maintenance. Last summer, Columbia Gulf was at a 40¢ /mmBtu premium to the Leidy Line index.

Northeastern headwinds

Prices for northeast production could face more headwinds from capacity constraints. Chesapeake said this week its ability to grow production there was limited by pipeline availability.

Earlier this month, the companies behind the 1 Bcf/d PennEast natural gas pipeline said they were writing off most of their investment in the project because of delays and permitting uncertainty. Dominion Energy and Duke Energy, the developers of the proposed 1.4 Bcf/d Atlantic Coast pipeline, already cancelled that project in June 2020 after permitting delays drove up construction costs.

Natural gas pipeline company Williams last year tabled plans to build the $1bn Northeast Supply Enhancement project that would bring 400mn cf/d into New York City, after New York and New Jersey denied key water permits. The next major expansion of northeast takeaway capacity, the 2 Bcf/d Mountain Valley pipeline, is scheduled to begin service in summer 2022, far past its initial goal of 2018.

Drilling in the Haynesville, meanwhile, has surged. Haynesville has roughly half of all the working gas rigs in the US and more than other US gas field, including the mammoth Marcellus shale.

By Jason Womack