Alan Armstrong has concerns.The president and CEO of the Williams Cos. Inc. doesn’t want natural gas producers and midstream operators in the Marcellus-Utica region to get caught off guard by rising demand, left without sufficient infrastructure to meet it.
Setting the tone for Hart Energy’s 2017 Marcellus-Utica Midstream Conference & Exhibition in January, Armstrong warned the audience that “there is a lot of work ahead” for the industry.
“You’re going to hear about the demand that is building up on the back of low-price natural gas,” he said. “I think it may catch us a little bit by surprise in areas like [Marcellus-Utica].”
This might have been a jolt for some celebrating President Donald Trump’s executive order, one day earlier, to accelerate work on the Keystone XL and Dakota Access oil pipelines. While optimism is indeed in order, Armstrong and other executives were on hand to remind midstream operators that it all still comes down to growing demand for natural gas and the industry’s ability to deliver it safely and efficiently.
“Several years ago, I spoke about getting large-scale NGL takeaway capacity here, and we’re still fighting that [lack of capacity],” he said. “We still haven’t solved that as an industry. We’re still waiting on getting some of that big infrastructure in place.”
He said the lack of NGL takeaway shifted much of the region’s drilling from rich gas to dry gas. More than 60% of the rigs in the Marcellus-Utica over the last year have been targeting dry gas, according to Armstrong.
“So we are excited about any and all infrastructure going out of the area, whether we are competing against it or not,” he said. “We are rooting for everyone’s pipeline, whether gas or NGL.”
And while it’s been an eventful year and a half for Williams Cos., with “a lot of distraction and a lot of change,” according to Armstrong, the company has maintained its “tremendous exposure and investment in the Marcellus and Utica.” (Williams made headlines for an on-again, off-again merger with Energy Transfer Equity.)
Armstrong said the company touches about a third of Marcellus-Utica gas through JVs and its own assets. Armstrong also pointed out that the company has maintained its focus on its Transco system—the largest interstate natural gas pipeline.
“By 2018, we will have doubled capacity on our Transco Pipeline, and that’s saying a lot when you’re starting with the largest pipeline,” he said, returning to his point about the importance of infrastructure in the region, which will be needed sooner rather than later.
And there is cause for urgency when it comes to building takeaway capacity in the Marcellus-Utica, he said. “As gas prices come down, we are seeing more and more people become confident in being able to invest in natural gas,” he said. “We really don’t have much doubt about demand [growth]. What we are worried about is this area having the ability to respond.”
He, like many of the executives at the conference, is particularly concerned for the region simply because “Marcellus-Utica is really the only area that has the scale to meet the coming demand,” he said.
“You can’t sneak up on the demand side. You’re talking about building LNG plants. You’re talking about building big power plants. You’re talking about 20-year commitments to downstream pipelines,” he said.
The basic infrastructure for supplying natural gas for the coming years is in place, he said. The key is to get it all connected and deliverable.
Armstrong showed that about 16 billion cubic feet per day (Bcf/d) of pipeline capacity is moving ahead, appearing well-supported from contracting and regulatory perspectives.
“If I were giving this presentation in October [2016], I wouldn’t have had quite as much confidence as I do today in this infrastructure getting built in time,” he said. But there are still challenges.
“This region has the demand, but the one thing that could kill that demand is high gas prices caused by lack of infrastructure,” he said. “It’s extremely critical to—not just this region, but also to the U.S.—that we are able to get this infrastructure built.”
But, Armstrong advised, now is not the time to get too comfortable and assume these projects will be built.
“We can be excited about [executive order] announcements, but it’s not changing the opposition we have at the local level,” he said. “We’ve got to bring a voice. We can’t be heavy-handed about it. We can’t sit back. We have to talk about the importance of infrastructure to the nation.”
Challenges in the Marcellus
The Marcellus Shale is now old enough that some of the early lease acres are expiring, so to hold acreage companies must drill.
Gas gathering is vital to facilitate this effort, said Patrick Redalen, president of Stonehenge Energy Resources II.
The prize is still enormous: some 214 trillion cubic feet (Tcf) of technically recoverable reserves in the Marcellus and another 184 Tcf in the Utica. “We have Tcfs and Tcfs of gas,” he said. “We estimate $110 billion of investment will be required. In the gathering piece alone, you’re going to need over 12,000 miles of gathering systems and lateral gas lines for $29 billion, so there is ample opportunity to pursue midstream projects in the region.”
But he and other speakers at MUM decried the challenges companies face to drill or install infrastructure. Many project and permitting delays are accompanied by challenges from landowners throughout the region. Redalen said, in many cases, Stonehenge spends more time upfront on permitting than it does on actual construction of its midstream assets.
“We have one eight-mile lateral we’re trying to put in and we’re looking at the permitting taking a year and a half, and that’s not counting that we have to deal with protecting a certain kind of rattlesnake and two species of bats,” Redalen said. “Even a one-mile stepout is taking six months to a year to get permitted.”
Despite delays and higher costs, an infrastructure backbone has started to develop in the region, with 9 Bcf/d of processing capacity and NGLs being shipped out to Europe and India.
To mitigate some of these challenges and get things done, Stonehenge believes in partnering with upstream producers who can take an equity position in its projects, and partnering with its suppliers and other midstream companies.
In the past decade, DTE Energy Co. has deployed $4 billion in Appalachia, and will probably deploy another $2 billion, according to Gregg Russell, senior vice president of DTE Gas Storage and Pipelines. A unit of the Detroit utility holding company, it does gas gathering, transmission, storage and distribution. It is a partner with Spectra Energy in the Nexus Pipeline which is expected to be in service in November 2017. It will move 1.5 Bcf/d from Ohio and Michigan to Canada.
DTE sees big gas demand growth in the southeast region of the U.S., but also in the Great Lakes area, a demand market just west of abundant Marcellus and Utica supply but which gets overlooked, he said. DTE alone plans to retire three of its coal-fired power plants, meaning more natural gas is needed.
“The Great Lakes region is a vast and misunderstood market,” he said.
As gas demand grows throughout the eastern U.S., midstream companies are only too happy to deliver burgeoning supplies from the Marcellus and Utica plays.
Tallgrass Energy Partners LP is one such company, the 75% owner of the famous Rex pipeline that was reversed from its Rockies gas supply flow to ship Marcellus gas west. An expansion went into service this January of 800 million cubic feet per day (MMcf/d) of additional capacity. It now takes 2.6 Bcf/d away from the Marcellus to points west. Antero Resources, one of the most active producers in the Marcellus-Utica, is one of the main producers shipping gas on the line.
“It’s all good for producers and consumers,” said Doug Walker, Tallgrass vice president. “We’ve got one and a half times the capacity so we’re having ongoing conversations with new power plant developers and with Indianapolis Power & Light. Originally Rex had 800 MMcf/d of contracts but we’ve added 1 Bcf more, so we’re pretty pleased.”
Utica outlook positive
Marc A. Halbritter, senior vice president, business development of Blue Racer Midstream, said he is optimistic about the future and the expected growth and need for processing plants in the Marcellus-Utica region.
Despite watching a steady decline in price for WTI, NGLs and natural gas, which has led to a significant decrease in drilling, he said activity has started to pick back up, noting “that’s the first positive indication of what the future may hold.”
Marcellus and Utica production is expected to drive growth among U.S. natural gas basins. It is expected to show 71% growth from January 2015 to 2021, according to Halbritter, who spoke in a panel at the MUM conference.
“In fact, Marcellus [and Utica] production is expected to surpass the Bakken and Eagle Ford in the early 2020s or 2030s. That’s the second positive indication that’s expected to come from there,” he said.
Also expected to drive production in the region is improvement of the price basis differential on the natural gas side, Halbritter noted.
“Natural gas basis has easily been over a dollar negative in the region from time to time as compared to Henry Hub, and you can see that over time just how wide it’s been.”
Ethane durability
A third indication that’s expected to increase production growth is the outlook of ethane demand, Halbritter said.
Up to 930,000 barrels per day (bbl/d) are going to be needed on top of what’s already being produced today, he said,
“There’s 1.9 million barrels per day today being consumed, but there’s another 930,000 that could come.”
That growth consists of 630,00 bbl/d from new ethane crackers on the Gulf Coast, and another 300,000 bbl/d of exports, he noted.
Another 245,000 bbl/d of recoverable ethane in the current stream of Marcellus-Utica production remains challenged, he said. “There’s going to be some challenges for ethane to make it down to the Gulf Coast to the ethane crackers down there.
And that’s mainly because it’s very high-cost to get there. By the time you add in incremental fractionation and transportation, you can be as high as 22 cents per gallon.”
Due to the high cost of access to the Gulf Coast—23 cents per gallon—ethane must beat at least $3.50/MMBtu above gas value. “So something is going to have to happen much more than the prices that you see for ethane, if ethane is going to come from the Northeast,” Halbritter said.
Even then, he said, local ethane pipes are nearly full with limited expansion capability, opening the door for local crackers.
“Ethane is a very, very important driver in what we expect to be a strong NGL recovery in the next 12 to 24 months,” said Frank Tsuru, president and CEO of M3 Midstream. In the Utica and the southwestern Marcellus, approximately 55% to 60% of that NGL barrel is ethane, he said, further noting that nationwide producers have been rejecting 500,000 to 600,000 bbl/d of ethane for the last couple of years.
“Current deliverability is 2 million barrels, and our demand is just under 1. 5 million barrels; therefore, the difference is made up through the rejection of ethane. In 2019, 2020, we see that the deliverability of ethane will dip below market demand.
“The market will adjust for the demand by increasing the price. In 2017, with ethane about 30 cents, the only profitable area for ethane recovery is the Gulf Coast, Texas or Louisiana. By the time we get into 2018, we predict ethane prices will be substantially higher allowing some of the other regions including the Marcellus-Utica to recover ethane. Finally by 2019, the market demands will be such that, we see all basins in the U.S. will be recovering ethane and balance the market,” Tsuru explained.
Tsuru also said there’s significant capacity of gathering and processing assets out there to handle any increase in production in 2017 and 2018.
“Billions of dollars have been spent for new infrastructure to meet Northeast production demand. NGL is a huge component of the value chain and we’re expecting demand for NGL to outpace our ability to supply,” Tsuru said.
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