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New Natural Gas Infrastructure: How Much and Where? Bethel King, Director, Market Analysis, RBAC Inc., February 22, 2012

The natural gas industry finds itself in a new era of natural gas pipeline development. Shale gas has created a new paradigm. Some shale production has been developed with minimal impact to the interstate pipeline grid because of its location near large legacy pipelines. So the biggest activity in these instances has to do with gathering, compression, and processing – a boon to midstream companies and those MLPs in the right place at the right time. But not all activity is limited to this midstream space, so the next question is how much mainline capacity is needed and where?

Barnett Shale

In the Barnett Shale area, we saw a lot of midstream activity, but the follow-on result was a bottleneck in the Carthage area in Northeast Texas as soon as local load was satisfied. This spawned a spate of Carthage to Perryville pipelines. Many of the developers of this infrastructure, along with potential shippers, used RBAC, Inc.’s GPCM Natural Gas Market Forecasting System® to model alternative scenarios in order to make decisions on whether the capacity was needed or should their company subscribe to the new space. One of the advantages of using GPCM® is that the model includes all of North America including Canada and Mexico as well as taking LNG imports into consideration. One of the interesting things that scenarios showed at that time was that many of the competing projects to take Barnett Shale from the Carthage area to Perryville would just be moving some of the bottleneck east and not completing solving the problem. Companies considering LNG import facilities also saw in some cases that building LNG header pipes that hooked into long-haul pipelines that delivered to big markets in the Mid-Atlantic and Northeast needed to interconnect further east than the new Carthage to Perryville pipelines in order to get the best net-back. Other developers of LNG import facilities saw that connecting into some of the new Carthage to Perryville lines was more cost-effective than building longer header pipelines.

As the Barnett Shale unfolded and experience with new technology improved outcomes in Fayetteville, Haynesville, and Woodford, we have seen natural gas prices fall significantly. At the same time, crude prices have increased due to continued strong growth in the developing world.

These trends have shifted focus among producers to higher-value liquids rich natural gas production, which has made Eagle Ford and Marcellus more attractive to producers and midstream companies.

Eagle Ford

Eagle Ford has seen an immense amount of Midstream attention due to its liquids-rich production, but the net affect from scenario testing with the GPCM Fundamental model shows that continued growth in this area will lead to a push back from western Texas supply toward Southern California and increased exports to Mexico. We have already seen this taking place with the 1st six months of 2011 exports running 186% year-over- year and larger than the first six months of any year going back to 1998.

Marcellus

In the Marcellus shale area there have been two distinct phases of infrastructure development. The first saw a number of announcements with in-service dates of 2012 – 2014. Many of these were developed to essentially pick up incremental supply in the Pennsylvania area and with minimal looping and/or compression deliver to traditional Mid-Atlantic and Northeast markets. These projects also included additional interconnects to allow hop-scotching across under-utilized sections of other area pipelines to reach New Jersey or New York markets. As Marcellus producers and liquid processors connect gas to the mainline faster than originally expected, many of these projects are being pushed up to 2010 – 2013.

As many scenarios with GPCM Fundamental model revealed, the potential of the Marcellus Shale production over-shooting local demand, particularly in areas with large storage facilities like Leidy, it became obvious that additional paths needed to be developed to allow optionality. Development is also driven by topographical and locational considerations of terrain and NIMBY issues. There are always risks to production estimates and hence infrastructure needs. Key among them for shale is regulatory risks. Concerns of potential water contamination are significant issues that need to be addressed and are not going away anytime soon. Below is a chart that demonstrates a comparison from one GPCM Fundamental Model scenario that compares Marcellus Shale supply and MidAtlantic Natural Gas demand for total demand (residential, commercial, industrial, and gas-fired generation).

The magnitude of this area continues to exceed all expectations. To have a sense of the size of just this single shale fairway, Texas Eastern has reported that they will have Marcellus connects up to 5,600 mmbtu/d by the end of 2012 in Spectra Energy’s March 22, 2011 presentation. This is just one of several large long-haul pipelines that can take advantage of incremental supply and there are many more pipelines and infrastructure companies with interests in the area besides Texas Eastern.

This has made pipeline developers become much more creative and innovative, hence the 2nd wave of developments. Below is a chart that shows some of the more promising projects in the Marcellus area from both the first and second wave.

Selected Expansions in Marcellus Area Phase I

In-Service Date

Incremental Capacity

Dominion Hub I

Nov-09

200

Equitrans Big Sandy Lateral

Apr-09

130

Iroquois 08/09 Expansion

Nov-09

200

Iroquois NYMarc Connector

Nov-14

500

Iroquois Wright Transfer Compressor

Jul-12

375

Millennium Pipeline & Associated Northeast Prj.

Nov-08

525

National Fuel Northern Access (Backhaul)

Sep-12

320

Tennessee 300 Line Expansion

Jan-11

345

Tennessee Northeast ConneXion

Nov-07

141

Tennessee Northeast Project

Nov-13

636

Texas Eastern NJ/NY Expansion

Nov-14

800

Texas Eastern Northern Bridge

Nov-09

150

Texas Eastern TEMAX

Nov-10

395

Texas Eastern TIME 2012

Nov-12

190

Texas Eastern TIME 2013

Nov-13

500

Texas Eastern Time II

Nov-08

150

Texas Eastern Time III

Nov-10

60

 

Selected Expansions in Marcellus Area Phase II

In-Service Date

Incremental Capacity

Empire Tioga County Extension

Sep-11 (Sep-13)

350 (350)

Dominion Appalachian Gateway

Sep-12

484

Inergy Stagecoach Hub MARC I Hub

Jul-12

550

Inergy Stagecoach Hub North-South Project

Nov-11

325

Millennium Expansion

2014

675

Millennium Laser Gathering Supply Link

Aug-11

400

National Fuel Line N expansion

Sep-11 (Nov-12)

160 (195)

National Fuel West to East

Nov-13

425

Tennessee NE Supply Diversification

Nov-12

250

Tennessee NE Upgrade

Nov-13

636

Transco Northeast Supply Link

Nov-13

250

Because of the issues mentioned above, even competing projects have been able to have success in signing on shippers. Many in this second wave are backhauling incremental supply in order to re-route it to alternative interconnects or markets, and therefore widening the absorption of the impact of so much additional gas.

One example of creative activities is the Empire pipeline. By building a lateral Empire pipeline is going to be able to essentially reverse the traditional flow of the pipeline as well as make interconnects with Millennium and Tennessee more viable. Backhauls are going to be necessary to provide the locational arbitrage that producers, shipper, and markets are going to demand. Key areas to watch are Transco Zone 6 to Zone 5, cross-border flows reversing to serve Eastern Canada rather than importing from long-haul western Canadian supplies, and perhaps even gas pushed back into the Ohio valley – particularly if emissions legislation makes natural gas-fired generation more attractive.

Natural gas infrastructure development tends to go in cycles. It is also not unusual for pipeline capacity to arrive in a chunky rather than a smooth fashion. Capacity arrives and takes some months for volumes to arrive to fill it up or producers are just waiting to finish completions to fill any available outlets as soon as they come online. In some cycles we see several competing projects extend open seasons trying to win shippers over to “their” team.

Occasionally we see game-changing projects such as Alliance or Rockies Express, long-haul pipelines that are developed to take distressed gas to new market areas and which change the entire relationship of basis in both receipt and delivery areas.

There has been some concern recently that lack of mobility in the Marcellus shale area will adversely influence the basis spread in the mid-term (2 – 5 years out). The projects listed above are proof that pipeline developers are ready and willing to prevent bottlenecks in getting this supply to market. It will be interesting to see whether these projects will be able to work well together to keep a basis collapse from happening.

RBAC’s Founder, Dr. Robert Brooks, puts it this way: “Production which thoughtfully addresses valid public concerns about the environment and particularly local water supplies, adequate midstream development of processing and gathering, and follow-on transmission line development that creatively routes gas to traditional and new customers will ensure that the market as a whole benefits from this potentially huge shale play.”

RBAC has been the leader in building the fundamental analysis tools used by the energy industry and related government agencies for nearly two decades. The GPCM® Natural Gas Market Forecasting System™ is the most widely used tool of its kind in its markets.  RBAC other products include the GPCM Daily™ Gas Model, GPCM Viewpoints®, NGL-NA™ Model, Global Gas Market Model (G2M2™) and a power model interface (GPCM-PMI™) for power demand modeling that integrates with Natural Gas and other fuels.

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