May 2011, Vol. 238 No. 5


Marcellus 2011: Big Play Sorting Itself Out

Derek Weber, Contributing Editor

As the unfolding North American saga that is the unconventional resource revolution enters the next phase of what has seemed a fast and furious evolution, many are taking stock; surveying carefully from the current vantage point the ever-spreading opportunity sprawl below.

What is most illuminating might be just how settled this particular valley is and how quickly this sometimes unpredictable energy paradigm became status quo. After habitually following the frenetic and bold history of shale gas in quarters and years, it may be worth chewing over the fact that we are entering a probable second act that has in its entirety legitimately spanned more than half a century.

After unlocking the key in the U.S. to this vast global resource potential, even the very definition of unconventional seemed to change as we passed the 50% mark in lower 48 state production, largely on shale production out of the “Magnificent Seven”, namely the Barnett, Haynesville, Fayetteville and Marcellus plays, respectively, and the often under-represented and more often understated coal bed methane and tight gas production contributions in the West and Southwest.

Core structural changes to the market, with shale as the catalyst and the physical integration of the North American market as the accelerant, saw more than 14,000 miles and 130 Bfc/d in new capacity added in interstate and intrastate pipelines in the last five years.

After a massive decline in 2009 when spot gas prices on Henry Hub moved from $13 to $3, the market eventually saw the steady return of rig counts, with horizontal rigs taking the lead and production buoyed on initial rates of production, rig efficiencies and the continuing refinement of drilling and hydraulic fracturing technology and techniques. The subsequent rebound saw Haynesville, Fayetteville and notably Marcellus rig counts increasing as many previously positioned Barnett rigs shifted to these and other plays.

Major changes in the North American production market also caused changes in the gas supply map. As the production line of demarcation shifted east when shale gas production hit full steam in Barnett, ramped up in the Haynesville and got started in the Marcellus – the industry also witnessed the steep decline in price volatility, in basis differentials and shale play activity shifting east with Fayetteville, Haynesville and Marcellus, doubling year over year into 2010 to 6 Bcf/d.

Upon deconstruction, Marcellus just might be shale’s perfect storm; the box-within-the-box of the U.S. gas supply map – and perhaps the true gamechanger of the gamechanger. Market analysts are verifying their confidence in this play and staying with the Marcellus for the foreseeable future where the oft excessive use of the term gamechanger may just roundly apply – this “little engine” with near-perfect location via its adjacency to Northeast and Mid-Atlantic consumer markets has racked up a long pedigree of positives in short order.

Marcellus, with its twin-heart geography; vast wet and dry acreage; if not fresh ink, then freshly drying ink on lease contracts; a “rock star” status in terms of IRR economics, massive foreign investment in the form of drilling cost carries, the deep involvement of majors – ExxonMobil (XTO), Shell (East Resources) and Chevron (Atlas); shale acreage hedging news that seems to favor this play repeatedly; and perhaps most importantly, well-timed capital investment in pipeline and midstream infrastructure development aimed at keeping pace with blistering shale production rates.

As the largest unconventional shale gas play in the world – notable in a far-flung and prolific field of 688 plays in 148 basins (at last count) – Marcellus stretches more than 40 million acres predominately across large swathes of Pennsylvania, New York, West Virginia and Ohio. In light of the sheer number of moving parts that constitute this highly fluid play – with varied components spanning and occupying technical, environmental, economic, political and regulatory spheres – from the point of view of production alone, the Marcellus emerges as an undeniable success story.


It has already reached and exceeded the 2 Bcf/d mark – moving in two years from uncertain baby steps to a full-on run, beating “mid” case estimates by as much as +1 Bcf/d on gas moving into existing systems owned and operated by operators Spectra, El Paso, Williams, Dominion, National Fuel Gas, EQT and NiSource.

One key concern present from the start has been the commitment level, timing and pace of pipeline and midstream development. So far, concerns of capacity deficits acting as governor have proved mostly unfounded – yet it remains to be seen if that is the case in 2014 when planned in-service dates for the lion’s share of new and expansion projects are set to come to fruition, coupled with expected production figure forecasts close to 6 Bcf/d.


Pipeline capacity, seen as a critical challenge for the Marcellus, is seeing significant growth and poised to add 9.4 Bcf/d of total incremental capacity spread through 25 projects over the next three years. Two well-established pipeline operators – National Fuel Gas and NiSource are digging in and betting big in terms of capital investment on this play.

National Fuel Gas Supply Corp.
National Fuel Gas Supply, with one of the most extensive and well-positioned pipelines in New York and Pennsylvania, has major plans to build on its existing pipeline systems, improving capacity and enhancing the region’s intrastate and Marcellus-dedicated infrastructure. Plans being translated into a series of major projects being developed by National Fuel Gas Supply Corp. and Empire Pipeline, Inc. are looking to add up to 2 Bcf/d of new incremental capacity on a system that has a contracted capacity of approximately 2.7 Bcf/d, according to NFG sources.

What began as a response to early shale producers such as Range Resources, East Resources (now Shell), Talisman and Seneca Resources (also a NFG company) acting as growth catalysts in pipeline project development linked to the geographic expansion within the play, have been broadened in scope to enhance market potential from a higher altitude and the next level of investment and project complexity.

One frequent message from analysts, producers and investors alike to operators has been the need for new capacity and new pipelines to keep pace with production potentials. Speaking on this subject, Ron Kraemer, vice president of National Fuel Gas Supply, characterized these first critical tactical moves in response to producer requests as an opportunity for “[NFGSC] to utilize [its] existing 20-inch pipeline, make some improvements to it, build a new 5,000-horsepower compressor station, and reverse the flow of this pipeline, such that we could move 160,000 Dth/d to a new interconnection with Texas Eastern Transmission in Greene County, PA.


“Shortly thereafter, the development began in the northeastern flank of the Marcellus. In Tioga County, PA [NFGSC] developed a 350,000-Dth/d 24-inch extension and expansion of our Empire Pipeline to interconnect with the gathering systems of Shell and Talisman,” Kraemer said.

For NFGSC, the stated goal was about serving the needs of the pioneering producer set. It was vital to ensure that drilling programs could continue – with the Tioga County Extension Project providing Shell and Talisman in particular “with an economic way out of the congested Appalachian pipeline network”, explained Kraemer, adding that, “when these facilities go in service in September (2011) they will allow [NFGSC] to reverse the flow of the Empire Pipeline and provide access to TransCanada Pipeline at Chippewa and the Tennessee Gas 200 Line headed to New England.”

Echoing the flow-reversal project capabilities of the Tioga County Extension, NFGSC is also developing a major project in the northeast heart of the play, the Northern Access Project, which is set to provide 320,000 Dth/d of capacity for Statoil from the Tennessee Gas Pipeline 300 Line to TransCanada Pipeline at Niagara – expected to be in service in late 2012.

Another National Fuel Supply major pipeline project, the West to East project, is designed to move Marcellus production from the just-developing mid-section of the Marcellus play, to markets at the Leidy hub by late 2013.

“One of the keys to our ability to develop these projects has been the existing infrastructure we have in the heart of the Marcellus. In addition, we have a group of experienced pipeline and compression engineers and planners familiar with the multitude of state and local permitting agencies, land stewards and construction practices in sometimes challenging topography. These assets have allowed us to develop relatively economic projects, holding down the transportation rates and meeting in service commitments,” said Kraemer.

NiSource Gas Transmission & Storage
Houston-headquartered NiSource Gas Transmission & Storage (NGT&S), which operates more than 15,000 miles of interstate pipelines across the Gulf Coast, Midwest, Mid-Atlantic and Northeast and sees 1.3 Tcf/y through its pipeline (and storage) systems, has deep roots and a long history in and around the greater Appalachian region and is well-situated in its operations and assets – namely in regards to its Columbia Gas Transmission pipeline system which averages 3 Bcf/d through the mainline 12,000-mile network covering 10 states, including Marcellus states Pennsylvania, New York and West Virginia.


NGT&S has proven adept at optimizing its existing system over the last two years and is viewed as ideally suited to making significant area impacts in terms of additional take-away capacity. According to Claire Burum, senior vice president, Regulatory Affairs and Business Development, NGT&S has been “utilizing existing infrastructure {while planning] greenfield pipeline projects to create additional firm transportation capacity;” directing approximately $200 million in investments in Marcellus-area projects and has in turn been able to create 1.15 Bcf/d of new incremental capacity.

However, like most of the larger Marcellus pipeline operators, the next three years are going to be critical to facilitating a C-change boost in capacity. In response, NGT&S has announced what amounts to an order of magnitude step-up in investment, focused on developing an additional 2 Bcf/d in new outlet capacity on potential capital of $2.1 billion, designed to target the “[full utilization] of [NGT&S’s} strategically positioned assets to accommodate Marcellus shale production, [in order] to grow and adapt to provide critical transportation services to both producers and markets,” said Burum.

Two projects that epitomize this next-generation of commitment and spending at NGT&S are the Kennesaw Pipeline project and Pennstar Pipeline.

The intent of bringing the Kennesaw Pipeline project to fruition is to enhance NGT&S’s capabilities to access and transport shale gas from many major U.S. basins, including Marcellus, Haynesville, Barnett, Fayetteville and Woodford Shale to the fast-growing user markets of Mississippi, Alabama and Georgia through access on Columbia Gulf Transmission and Columbia Gas Transmission systems, taking advantage of existing power corridors and seeking to utilize more efficient compression to lower emissions and energy consumption.


Kennesaw Pipeline, which is planned to extend 269 miles from Banner, MS to Rome, GA will operate at 1440 psig maximum allowable operating pressure and, depending on capacity sales, the first 78 miles will be built with either 42- or 36-inch pipe, with the remaining 188 miles constructed using 36-inch pipe. The initial long-haul capacity is set at 950,000 Dth/d with an additional 600 MDth/d available with possible future upsizing. In a planned second phase, Kennesaw capacity could increase to 1,316,000 Dth/d, (1.3 Bcf/d). The proposed route is close to a number of existing major storage fields which include 32.5 Bcf of combined working gas capacity, 1.12 Bcf maximum injection capability and 1.24 Bcf maximum withdrawal capability. The project has a planned in-service date of 2014.

Where Kennesaw looks to provide the utmost flexibility in transportation from and access to an array of major U.S. shale play production, Pennstar Pipeline, a 125-mile planned joint project between NGT&S and Valley Forge, PA-based UGI Corp. (which earlier this year announced independent plans to invest approximately $300 million over the next two years on midstream projects to support development of natural gas infrastructure in the Marcellus region) represents a targeted Pennsylvania Marcellus Shale project designed for the high-value consumer markets of Baltimore, Philadelphia, New York, Boston, and Washington DC with the possibility of future exports to Canada.

The Pennstar Pipeline, with an estimated 500,000 Dth/d of transportation capacity, will cross the major interstate pipelines that serve the Northeast and Mid-Atlantic states and provide multiple points of access for producers and customers. It is suited to handle increased production along Columbia Gas Transmission pipeline system in Clearfield, Centre and Clinton counties with interconnections with Williams, Transcontinental Gas Pipeline Corp., El Paso’s Tennessee Gas Pipeline Company, Dominion Gas Transmission and Millennium Pipeline in north-central Pennsylvania and southern New York. The project has a planned in-service date of 2013.

Speaking on this distinction and the specific requirement of the Marcellus, Colin Harper, senior vice president, Commercial Operations, said “[this]play has a growing need for infrastructure projects to gather, treat, process and transport natural gas and gas liquids to market. While there are many companies jumping on the Marcellus bandwagon, NGT&S remains one of the most competitive in the market with our well-positioned Columbia Gas assets [and midstream business]. We will continue to build on this advantage with an array of projects designed to meet the needs of our customers for the decades ahead.”


The Pennstar Pipeline and Kennesaw Pipeline project teams are engaged in producer discussions to refine the timeline, working on securing commitments from customers, and are beginning outreach to state and local regulatory bodies to prepare for the filing process.


In addition to major commitments toward expanding transmission capacity, NGT&S is keeping pace in the critical midstream sector. This is a significant potential chokepoint of Marcellus growth as major interstate and intrastate buildouts with in-service dates through 2014 are moving ahead and doubts continue to grow that the midstream and processing infrastructure required will almost certainly lag behind the other two legs of production and transmission. NiSource Midstream Services (NMS), a wholly owned entity of NiSource Inc. was formed to provide specific natural gas producer services such as gathering, treatment, conditioning, processing and liquids handling with an emphasis on the Appalachian Basin.

“Since the commencement of the Majorsville processing complex, producers in the Marcellus have gained the additional capacity they needed to move their gas to downstream markets,” said Christopher A. Helms, executive vice president and group CEO for NGT&S.

“A significant initiative for NGT&S is to offer new solutions to customers for transportation of supplies to valuable markets. We will continue our strategy of disciplined investment in growth projects to adapt our system to provide critical services to our customers,” Helms said. (Image Robbon Cutting at Majorsville; NGT&S and MarkWest)

The Majorsville Processing Complex, a jointly developed NMS and MarkWest Liberty Midstream & Resources, L.L.C., gas gathering, processing, and transmission complex – located in Majorsville, WV – represented the first integrated gathering and processing system serving Marcellus Shale production in southwest Pennsylvania. Commissioned in August 2010, the Majorsville Complex significantly augments the midstream infrastructure that NMS and MarkWest Liberty independently operate. The gathering and processing facilities are fully contracted and will serve various producers including affiliates of Chesapeake Energy Corp., Chief Oil & Gas, CONSOL Energy/CNX Gas, Range Resources and Statoil.

These assets allow NMS to gather and deliver 88,000 Dth/d of liquid-rich Marcellus gas production from Washington and Greene counties in Pennsylvania and 250,000 Dth/d from Marshall, Wetzel, and Doddridge counties in West Virginia to the MarkWest Liberty Majorsville processing plant. Residue gas from the processing plant is delivered into the NGT&S interstate pipeline system.

Additionally, MarkWest Liberty operates a 120 MMcf/d cryogenic natural gas-processing plant at the Majorsville processing complex and a 35-mile NGL pipeline that connects the Majorsville complex to MarkWest Liberty’s midstream complex in Houston, PA where NGLs are fractionated, transported, stored, and marketed into high-value markets in the northeastern U.S.

Challenges For The Future
The global effects of shale gas are already being felt, accelerating as the world reassesses its energy equations in light of political changes in North Africa and the Middle East and the hydra’s bite of environmental consequence linked to multiple natural disasters in Japan. The opportunities for a shale future outside the U.S. along with the typically glacial movements in production internationally are now finding newly energized momentum.

The plays of tomorrow will be in places like Poland and China. However, today one can take a look at the work being done by companies such as NGT&S and National Fuel Gas Supply Corp., in Pennsylvania and West Virginia to watch what will likely remain the most interesting game in town for quite awhile.

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