October 2014, Vol. 241, No. 10


SNL Energy: Pipelines aim for Chicago as North American market adjusts to Marcellus

Sean Sullivan, SNL Energy

Anticipating bidirectional flows on the Rockies Express Pipeline LLC system, natural gas transportation companies have launched new efforts to deliver incremental pipeline capacity to the Chicago market.

Developers of two separate gas pipeline projects into Chicago offered open seasons last week; both projects would capitalize on Marcellus and Utica gas flowing westward from the Appalachian Basin on REX. AGL Resources Inc. and Tallgrass Development LP are developing the 1.5 Bcf/d Prairie State pipeline project, and the Kinder Morgan Inc.-operated Natural Gas Pipeline Co. of America LLC announced two days later an open season for the Chicago market expansion project.

Representatives from each Chicago pipeline project said the market would determine whether both pipeline proposals would be needed.

“The market will decide by their response to the open seasons whether or not both projects are supportable,” AGL President of Storage and Fuels Steve Cittadine told SNL Energy in an Oct. 21 email. “Prairie State Pipeline’s advantage is that it is new-build pipe that will be designed specifically to meet the needs of its customers from a deliverability and reliability standpoint. The specific design of Prairie State Pipeline is to deliver high pressure into the Joliet hub.”

The Kinder Morgan camp believes the NGPL project has the edge.

“There are three primary advantages to this project,” spokeswoman Sara Loeffelholz wrote in an email. “1. Scalability. The NGPL project only requires a small, incremental commitment of 280 MDth/d to make this economic, and no new pipelines need to be built. 2. Cost effective. The existing, tariff-based rate structure can support project economics at a lower price than alternatives. 3. Access. It would provide hundreds of Chicago delivery points to multiple LDC markets.”

Chicago is a major hub in the North American natural gas market, and Gordon Pickering, director of the oil and gas practice in Navigant’s Energy Group, noted that the Midwest is looking for more natural gas. Luckily for regional consumers, it does not have the infrastructure constraints of the Northeast.

“There is a lot of capacity in Chicago,” Pickering said. “It’s not like the Northeast market.”
Pickering pointed out that Chicago can choose between gas supplies from the Gulf Coast, Canada and an increasing amount from the Marcellus. With the addition of REX, the Chicago market could take its pick of inbound supplies, and its choice could displace gas that could be rerouted toward export projects in the U.S. and the Canadian west coast.

“All of these things are connected,” Pickering said. “My sense now is that if REX is reversed, I don’t know how much more capacity is required from new pipelines to serve that [Chicago] market.”

Two Chicago pipelines
The developers of the two Chicago pipeline projects see a bidirectional REX as an important natural gas conduit into the region.

“AGL believes that the Rockies Express pipelines future bidirectional capability in Zone 3 (Illinois, Indiana and Ohio) would not only provide Prairie State Pipeline access to Marcellus and Utica volumes but also to Rockies supply, allowing for additional price competition in the Chicago/Midwest markets,” Cittadine said.

“By providing access to a diverse portfolio of competitively priced gas supply, Prairie State delivers a critical layer of deliverability and reliability to the Chicago/Midwest market,” he said.

“AGL, as a potential investor, stands to benefit from the successful implementation of this [Prairie State] project,” Cittadine said. “Nicor Gas [AGL’s Northern Illinois Gas Co.], whether it decides to bid for capacity or not, will benefit from access to a more diverse portfolio of reliable, competitively priced gas supply.”

NGPL is also looking to both Rockies and Marcellus supplies. “The NGPL Chicago Market Expansion Project would increase the existing capacity for producers transporting on REX (whether Rockies-based or Marcellus/Utica-based) to most directly access Midwest markets,” Loeffelholz said. “It would also provide Chicago-area markets with increased ability to access economically priced gas.”

Both companies are checking for other opportunities in the Midwest. “Kinder Morgan continues to evaluate projects focused on the Midwest market based on customer interest and requirements,” Loeffelholz said. “Our current footprint gives us numerous market and supply opportunities.”

Cittadine said AGL was looking inside and outside its footprint. “AGL continues to look at projects which would either provide synergies with its existing assets or provide solid financial returns on a stand-alone basis,” he said.

Center of the North American gas pipeline system
The revitalization of REX is part of a wave moving across the North American natural gas network as the infrastructure adjusts to growing gas demand and booming gas production in Appalachia.

According to the U.S. Energy Information Administration, recent developments in U.S. energy production, especially the rapid growth of tight oil and shale gas output, are leading to significant changes in the nation’s energy trade flows. Even in 2008, when the original REX mainline was being built, the EIA said 26 interstate and at least eight intrastate natural gas pipeline companies were operating in Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin. One-quarter of pipeline capacity entering the region was carried by Canadian pipelines.

The effort to make REX bidirectional represents the revival of a large, underused gas asset, following a narrative similar to the current resurrection of U.S. LNG import terminals as export facilities and likewise linked to increases in U.S. gas production. REX has applied to FERC for a project that would give bidirectional gas flows on its mainline between Ohio and Illinois; the entire mainline, originally designed to take Rockies gas to Eastern markets, travels almost 1,700 miles between the Rocky Mountain region and Ohio. Pickering noted that there could be some challenges to the FERC application, as firm shippers on the original pipeline have stepped into the review process to protect their interests as gas transportation customers. (CP14-498)

The Northeast gas market is still the “number one market for the Marcellus and Utica” because of its size and the prices paid for gas, Pickering said, but there is so much gas in these shale plays that it will need to “look for a home” in the Midwest, Southeast and other areas. The Midwest needs gas for electric power generation and industrial use and heating needs in the winter, although because of its available pipeline capacity its winter gas demand peaks do not reach the extremes of those in New England.

If the REX mainline turns around, “it has a multifaceted impact,” making more gas available in the Midwest market and also markets to the west, Pickering said.

“One of the key resulting impacts will be some more pressure on the Western Canadian producing basin,” Pickering said. “As REX gets reversed, the Canadian supply basin becomes further under pressure from indigenous U.S. gas, which is now not only supplying the U.S. Northeast but also the Chicago market, which was trying like crazy last winter to get all the gas it possibly could from wherever it could, including more gas from the Marcellus, but it was just that the infrastructure was not available yet. They did go as far afield as Dawn [hub in Ontario], for instance, which has basically been a storage basin that has been used in Canada, but was being used by the Chicago market to serve some of their weather and demand peaks over the last winter.”

“Everything starts to circle back to Marcellus/Utica,” Pickering said.

Energy Transfer Partners LP is developing its own Midwest gas pipeline, but Pickering and Cittadine said ET Rover Pipeline Co. LLC will not compete with the new REX. Although both projects would receive supply from the same general regions, ET Rover would cross Ohio and then aim for Michigan and Ontario, while REX would go further west.

REX is 50% owned by a subsidiary of Tallgrass Development, 25% owned by a subsidiary of Phillips 66 Co. and 25% owned by a subsidiary of Sempra Energy.

Editor’s note: This article reprinted with permission from SNL Energy.

Related Articles


{{ error }}
{{ comment.comment.Name }} • {{ comment.timeAgo }}
{{ comment.comment.Text }}