Utica and Marcellus Shale operators received major good news last week. Williams Companies (WMB) and Boardwalk Pipeline Partners (BWP) announced on March 6 a Joint Venture to develop a high-capacity pipeline that would transport natural gas liquids from the infrastructure-constrained Utica and Marcellus South to the rapidly expanding petrochemical and export complex on the U.S. Gulf Coast. Perhaps the most important part of the announcement: the in-service date would be in 2015, remarkably soon given the scale of the proposed project.
The announcement is significant and should have a meaningful impact on the outlook for the liquids-rich development in the Marcellus/Utica area.
Bluegrass Pipeline May Double the Utica/Marcellus Ethane Takeaway Capacity
The proposed "Bluegrass Pipeline" would provide producers with 200,000 bbl/d of mixed NGLs take-away capacity in Ohio, West Virginia and Pennsylvania. Capacity can be further increased to 400,000 bbl/d via additional liquids pumping capacity. (For reference, the three existing pipeline projects under development that are designed to provide the critically needed ethane transportation solutions to the region - the ATEX Express, Mariner West and Mariner East pipelines - have a combined takeaway capacity of 280,000 bbl/d).
The Bluegrass Pipeline would deliver mixed NGLs to proposed new fractionation and storage facilities on the Gulf Coast, which would have connectivity to petrochemical facilities and product pipelines along the coasts of Louisiana and Texas. Williams and Boardwalk are also exploring development of a new export liquefied petroleum gas (LPG) terminal on the Gulf Coast to provide customers access to international markets.
As currently proposed, the project would include three key elements:
- Converting the section of the existing Boardwalk's Texas Gas Transmission pipeline (the red line on the map above) from Hardinsburg, Kentucky to Eunice, Louisiana from natural gas service to NGL service, including construction of new pump stations and related facilities (see the maps below for detail);
- Constructing a new NGL pipeline from producing areas in West Virginia and Ohio to an interconnect with Boardwalk's Texas Gas system in Hardinsburg, Kentucky; and
- Constructing a new large-scale fractionation plant and expanding natural gas liquids storage facilities in Louisiana and a new pipeline segment connecting these facilities to the converted Texas Gas pipeline.
The brownfield approach - which utilizes the larger portion of the existing Texas Gas line for conversion - should expedite in-service date to 2015 and significantly reduce the construction footprint and cost. More than half the distance of the proposed Bluegrass Pipeline is essentially already built.
The project will also leverage Boardwalk's recently acquired liquids infrastructure assets in Louisiana, which provide an important platform for the downstream fractionation and storage portion of this project.
The project development process is currently underway, including customer contracting, permitting, regulatory approvals, and right-of-way acquisition. Williams and Boardwalk expect to sanction the project this year and place it into service in the second half of 2015.
The project will need to obtain multiple regulatory and legal approvals and complete contract negotiations. Before Texas Gas Transmission may begin converting the proposed section of the pipeline to NGL service, it must receive abandonment authority from FERC. The abandonment application is expected to be filed with FERC by May 1, 2013 and the abandonment process is estimated to take between nine to twelve months.
Bluegrass Follows ATEX Express' Strategy
The Bluegrass Pipeline is the second brownfield gas-to-NGLs pipeline conversion providing access for the Utica and Marcellus ethane volumes to the Gulf Coast petchem complex. Enterprise Products' (EPD) ATEX Express Pipeline project has used a similar strategy, converting ~800 miles of existing pipeline to NGL service. ATEX Express is expected in service in Q1 2014 and will have initial capacity to transport up to 190,000 bbl/d or ethane from the Marcellus and Utica to Beaumont and Mont Belvieu, Texas.
Significance for the Utica and Marcellus
The Bluegrass Pipeline announcement is highly consequential for both the Utica and liquids-rich Marcellus. With all the excitement about the two plays' tremendous resource potential and highly compelling economics, operators have been severely constrained in their ability to place liquids-rich wells on production due to the absence of wet gas processing infrastructure and NGL takeaway capacity and have been forced to hold back their drilling activity. As a result, the development of the Utica and Liquids-rich Marcellus have essentially been on hold, with very few wells drilled relative to what one would expect given the massive potential of these two plays. In fact, the majority of wells drilled in the Utica have been sidelined: as of March 3, of ~250 wells drilled in the play, only 75 wells were producing, many on restricted rates, with another 155 wells essentially waiting on infrastructure.
It is important to note that liquids-rich gas is one of the most demanding, from infrastructure perspective, types of resource. It requires fairly complex and expensive processing and fractionation facilities, typically separate transportation channels for the multiple NGL grades produced (ethane, propane, butanes, pentanes-plus) and availability of end markets for each of the NGL products. Extracting NGLs is often not an option but the necessity. First, without the lucrative revenue stream from the NGLs, many wells simply would not be commercial. Second, many residue gas pipelines would only accept wet gas if it is "dry" enough to meet pre-set specifications (typically, pipeline operators impose dewpoint limitations on C4-C5+ content and heat value limitations on C2-C5+ content).
The ethane component of the wet gas production stream is particularly challenging. First, there is virtually no local end market for ethane in the North East region (the majority of "ethane crackers" are located on the Gulf Coast, in the Midwest region, and in Canada). Second, as opposed to heavier natural gas liquid factions, such as propane and butane, ethane cannot be easily liquefied to be transported via rail, truck or barge - a pipeline solution is required. Therefore, ethane is often left in the residue gas stream, with significant value lost that way.
So far, very little ethane has been recovered from the production stream in the Marcellus or Utica. Between July of this year and the start-up of the ATEX Express Pipeline in early 2014, the Mariner West Pipeline, owned jointly by Sunoco Logistics Partners (SXL), will be the only active ethane project and transportation solution for the ethane stream from the Marcellus and Utica, and MarkWest Energy Partners (MWE) will be the only processor recovering ethane. Volumes will remain negligible until the ATEX Pipeline comes in service.
For the next two-three years, Marcellus and Utica producers will likely be forced to recover only the minimum amount of ethane in order for their residue gas to meet gas quality specifications.
It is also important to note that very large percentage of total capacity on the three ethane pipelines (ATEX, Mariner West and Mariner East) and processing and fractionation facilities that are being developed has been already contracted, leaving very small amount of capacity available in the market.
Given the very strong growth potential from both Utica and Liquids-rich Marcellus, the existing and announced processing and off-take infrastructure may be quickly outgrown by the rampant production.
According to Williams:
Given current market dynamics in the Northeast, existing liquids systems and local outlets will be overwhelmed by 2016. Total NGL volumes in the Northeast are expected to exceed 1.2 million barrels per day by 2020. The proposed Bluegrass Pipeline joint venture would support Williams' midstream assets in the region, offer an attractive return and enable Williams to become the premier NGL infrastructure provider by economically linking the Utica and Marcellus region to petrochemical complexes on the U.S. Gulf.
In this context, the Bluegrass Pipeline project should provide the very much needed additional takeaway capacity for the ethane stream from the Utica and Marcellus and, importantly, introduce an element of competition among transportation providers. The 2015 in-service date would be nothing short of amazing.
Not Everyone Wins
The proposed pipeline introduces significant new competition to the highly concentrated midstream market in the Marcellus/Utica region. The Bluegrass project competes to a significant degree with MarkWest's fractionation facilities in the Marcellus/Utica area and Enterprise Products' ATEX Express pipeline project. The outlook for the proposed Royal Dutch Shell (RDS.A) petrochemical complex in Western Pennsylvania is also getting noticeably less bright: pipeline solutions for the ethane stream put this greenfield concept in direct competition with less expensive brownfield expansions on the Gulf Coast - an uphill battle that would be difficult to win.
Which Publicly-Traded E&P Operators Stand To Benefit The Most?
The new NGL transportation route would be a big gain for Utica and Marcellus operators, across the board. While no immediate impact will be visible in the bottom lines, it is clear that the Utica and Marcellus South are preparing for a major leap forward in development activity which should begin accelerating in earnest by the end of this year and gain massive momentum in 2014-2016.
The Bluegrass Pipeline improves the outlook for accelerated development in what is broadly perceived as the most economic and so far essentially unused, due to the infrastructure constraint, portion of the Marcellus/Utica plays. The project introduces competition in the transportation and fractionation market, likely leading to better price realizations. Also importantly, it demonstrates that additional transportation solutions can emerge and be executed within reasonable timeframe, given the vast U.S. pipeline network which is increasingly underutilized on the Gulf Coast to North East routes. The North East ethane supply turns out to be a lot more manageable of a problem than has been previously thought.
Select E&P operators in the Utica:
- Gulfport Energy (GPOR)
- Chesapeake Energy (CHK)
- Anadarko Petroleum (APC)
- Chevron Corp. (CVX)
- CONSOL Energy (CNX)
- Devon Energy (DVN)
- PDC Energy (PDCE)
- Halcon Resources (HK)
- Hess Corp. (HES)
- Magnum Hunter Resources (MHR)
Select E&P operators in the Liquids-rich Marcellus:
- Range Resources (RRC)
- Noble Energy (NBL)
- CONSOL Energy
- Chesapeake Energy
- EQT Corporation (EQT)
- Magnum Hunter Resources
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.