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By Alan Kovski
A surge in pipeline capacity for natural gas in the U.S. Northeast this year and next is expected to boost profits for producers and help hold down prices for Midwest and East Coast buyers.
The $13.8 billion infrastructure build-out involves seven large pipeline proposals that will take gas in all directions. Producers in the Marcellus Shale region—primarily in Pennsylvania, West Virginia and eastern Ohio—are eager for the pipelines because they have been hurt by depressed prices in pockets of inadequate pipeline infrastructure, compounded by a nationwide two-year slump in gas prices.
Gas producers in the region are likely to see substantial increases in profitability, said Andrew Weissman, the head of EBW Analytics Group and an attorney who specializes in energy practice at Pillsbury Winthrop Shaw Pittman LLP in Washington.
Leading producers in the Marcellus include Cabot Oil & Gas Corp., Chesapeake Energy Corp., EQT Corp., Range Resources Corp., Southwestern Energy Co. and Chief Oil & Gas LLC.
The Federal Energy Regulatory Commission, with regulatory authority over interstate gas transmission, has approved five of the seven large proposed pipelines for moving gas out of the Appalachian region, which includes the deeper Utica Shale underlying the Marcellus Shale. FERC decisions are not necessarily the last word, however.
“There are all sorts of relatively minor approvals that have to be granted for the pipelines to be completed,” Weissman told Bloomberg BNA, referring to such things as approvals for clearing trees along the routes.
Some landowners have tried to block pipelines to preserve their trees. Environmental activists also have strongly opposed the pipelines. Ample supplies of gas holding down prices can discourage competing wind and solar projects that don’t produce the carbon emissions causing climate change. The new pipelines also could spell more trouble for operators of electric power plants that rely on coal and nuclear energy in competitive wholesale power markets.
“We are opposed to all fracking and fracked-gas infrastructure,” said Lee Stewart, an organizer for the group Beyond Extreme Energy. In fracking, or hydraulic fracturing, layers of rock are fractured to allow gas or oil to flow to a well.
Opposition also can come from states, as the backers of the Constitution Pipeline project discovered.
The Constitution Pipeline, proposed by four companies including an affiliate of pipeline company Williams Cos. Inc., was approved by FERC in 2014 but blocked in 2016 by the New York State Department of Environmental Conservation, which refused to give it a Clean Water Act Section 401 water quality certification.
The Sierra Club applauded the decision. Roger Downs, conservation director for the environmental group’s Atlantic Chapter, said in a statement at the time that FERC pressured states to accept gas infrastructure projects, and that he hoped others would push back. (The Sierra Club has received funding from Bloomberg Philanthropies, the charitable organization founded by Michael Bloomberg, the majority owner of Bloomberg L.P., parent of Bloomberg BNA.)
The opposition came despite the trend of gas-fired power plants displacing coal-fired power, which is more carbon intensive and contributes more to climate change.
The state’s decision “blocks millions of northeastern consumers from accessing lower-cost energy while ultimately slowing the region’s capabilities in transitioning from coal and fuel oil to natural gas,” said Constitution Pipeline Co. LLC in announcing its decision to go to court.
The fate of the project awaits a decision of the U.S. Court of Appeals for the Second Circuit ( Constitution Pipeline Co. v. N.Y. Dep’t of Envtl. Conservation, 2d Cir., No. 16-1568, 5/16/16 ).
Gas prices are depressed wherever transmission constraints trap the commodity, creating a local glut. At some trading hubs in the Marcellus Shale region, wholesale gas prices in 2016 dipped below $1 per thousand cubic feet while prices were above $3 at Henry Hub, the Gulf Coast trading location most commonly used as a reference.
Richard Porter, a Houston-based senior managing director at FTI Consulting Inc., spoke to Bloomberg BNA about the value of pipeline projects to producers.
“It provides them a surety of market and revenue stability. It provides them with the cash flow they need to fund their exploration programs,” Porter said.
People have been bidding as much on the available pipeline space as on the commodity itself, he said, indicating the transportation costs have at times been as much of a market factor as the value of the gas.
Extra capacity should help stabilize the prices of gas, the cost of moving the gas and the cost of power generated from gas, Porter said.
FERC approved one big Marcellus gas pipeline in January and three more in the first week of February. Any more approvals must await the appointment of at least one more commissioner so that FERC can have a quorum.
The Atlantic Sunrise project received one of the approvals. It will include upgrades to existing lines that can be completed in 2017 and 183 miles of new pipeline set for completion in the middle of 2018. Williams, lead backer of the Constitution Pipeline, operates the Transco system, one of the largest gas pipeline networks in the United States.
TransCanada Corp., operator of the Columbia gas pipeline network, another of the largest gas systems, received approval for the Leach XPress pipeline but must await the appointment of a commissioner for its Mountaineer XPress project.
National Fuel Gas Co. received approval for its Northern Access pipeline to run north through New York.
Biggest of all in the new spate of approvals is Rover Pipeline, an Energy Transfer Partners L.P. project. It would cost $4.2 billion and be capable of moving as much as 3.25 billion cubic feet a day (Bcfd) of gas into the Midwest with connections that also could take the gas east, south and into Canada.
Also waiting in the wings is Nexus, a project backed by pipeline company Spectra Energy Corp. and DTE Energy Co., a Michigan utility. Enbridge Inc. completed its acquisition of Spectra Energy Feb. 27.
The seven projects, if built, will add up to 11.79 Bcfd of capacity coming on by late 2018. There seems to be no worry that the fast-growing output of the Marcellus and Utica shales can make use of it all.
“The Marcellus is poised for 19.1 Bcfd of production in March, and the Utica is expected to reach 4.2 Bcfd,” said Ken Ditzel, managing director of FTI Consulting’s Economic Consulting segment, in an emailed response to questions.
“Together, they’ll produce 23.3 Bcfd, or about 30 percent of U.S. production,” Ditzel said.
As tracked by monthly production data, Marcellus output has been increasing at an annual rate of about 6 percent, while Utica production has been growing at a 12 percent annual rate, he said.
“I see no reason for those growth rates not to continue into 2018, at a minimum, as more pipeline capacity comes online and producers continue to increase productivity and lower costs,” Ditzel said.
There are no other U.S. regions where such a big gas infrastructure expansion is coming, Porter said.
Growing demand for natural gas has been driven especially by its use as a generating fuel for electric power. Air emission regulations have combined with low prices to favor gas over other power sources, especially coal.
It has become more economical to replace coal-fired power plants with gas-fired plants rather than rebuilding the coal plants to cope with air regulations, Porter said.
The last two years of low gas prices have been hard on gas producers and competing power sources alike. In 2015, U.S. electricity generation from gas exceeded generation from coal, and in 2016 that advantage for gas increased, after decades of coal dominance in generation.
More gas-fired power plants are being built. The Energy Information Administration (EIA) said in January the electric power industry planned to increase gas-fired generating capacity by 11,200 megawatts in 2017 and 25,400 megawatts in 2018, resulting in capacity 8 percent higher than at the end of 2016.
Plans to export liquefied natural gas also are expected to be important demand factors. The EIA forecast a surge in LNG export capacity from the Lower 48 states to 9.2 Bcfd by 2021 from the current 1.1 Bcfd. All current U.S. export capacity outside of Alaska is at the Sabine Pass LNG terminal of Cheniere Energy Inc.
Brenda Shaffer, a senior fellow at the Atlantic Council Global Energy Center, cautioned that it remains to be seen how much of a market will be found for U.S. exports of LNG. It also remains to be seen what form the market will take, in terms of long-term contracts or spot-market trading, she said at a Middle East Institute discussion Feb. 28 in Washington.
The expansion of gas production in Appalachia also has revised the pattern of U.S. gas movement. For decades the flow was northward and eastward from Gulf Coast and Southwest producing areas, but that is changing rapidly.
Over the last five years, the Transco pipeline system operated by Williams has been receiving more gas from Pennsylvania than the Gulf Coast region, said Chris Stockton, a Transco spokesman.
“In a way things have been kind of turned upside down,” Stockton said.
The Atlantic Sunrise project will help take Pennsylvania gas south or northeast by linking to Transco mainlines. One of the customers lined up for gas through Atlantic Sunrise is Southern Co. for power generation in Alabama, Stockton said.
Companies lined up to move gas on Atlantic Sunrise are a mix of gas producers and utilities. The producers include Cabot, Chief, Southwestern, Anadarko Petroleum Corp. and the Seneca Resources subsidiary of National Fuel Gas. The MMGS Inc. gas marketing affiliate of Japanese conglomerate Mitsui & Co. Ltd. is another customer.
Not all pipeline companies disclose customer names. TransCanada would only say its Leach XPress and Mountaineer XPress projects are underpinned by long-term fixed-fee transportation service agreements.
The Trump administration’s interest in accelerating infrastructure development may be a relatively unimportant part of the near-term picture, given that five of the big Appalachian gas pipeline projects already have FERC permits and the other two are far enough advanced that they may need only a FERC quorum of commissioners to win approval.
In the longer term, beyond 2018, projects might benefit from a Trump administration push for accelerated permitting of gas pipelines and LNG export terminals.
The situation might have been more complicated if Hillary Clinton had won the presidency, Weissman, the EBW Analytics Group leader, said. The Obama administration had been edging toward requiring FERC, in its environmental assessments of projects, to calculate a gas pipeline’s indirect contribution to greenhouse gases because it facilitates fossil fuel production and consumption, he said.
Clinton might have gone farther in that direction, but Trump will not, Weissman said.
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