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FERC's order Wednesday to suspend all new horizontal directional drilling (HDD) for Energy Transfer Partners LP’s Rover Pipeline has the market anticipating a delay, at least to the project's Phase 1, an analysis of NGI's Forward Look prices indicates.
Phase 1 -- encompassing Rover's mainline segment to the Midwest Hub in Defiance, OH, and a number of gathering lines connecting producing areas of Pennsylvania, West Virginia and Ohio -- is scheduled to come online in July. Phase 2, which would connect to the Vector Pipeline in Michigan and the Dawn Hub in Ontario, is scheduled for a November in-service date.
After a prolonged environmental review conducted by the Federal Energy Regulatory Commission, Rover was already on a tight schedule to meet that target before the agency put a halt to new HDD activities.
News of FERC's order helped stir bullish sentiment in the futures market Wednesday as traders digested the possibility that Rover's 3.25 Bcf/d could hit later than expected; the news has also affected forward contracts at Dominion, NGI's Forward Look shows.
Trading activity suggests that the market sees Rover coming online this year, but maybe not by July in light of FERC's recent actions, according to NGI’s Patrick Rau, director of strategy and research.
"It looks like the Rover drilling order has shifted Dominion basis for the rest of the year out by a few cents," Rau said. "From trading day May 9 to May 10, the basis differential for Dominion South for the months of July 2017 through December 2017 moved from an average of negative 45.1 cents to negative 48.8 cents.
"August through October fell by more than a nickel each, while November and December declined by just 2.0 and 0.2 cents, respectively. That suggests to me that the market isn't quite as concerned about Phase 2."
FERC's order -- which prohibits all new HDD work on Rover pending an independent review of the operator's handling of a 2 million gallon spill of drilling fluids near the Tuscarawas River in Stark County, OH -- could affect Phase 1 by obstructing completion of the Clarington lateral, according to an analysis conducted by natural gas consulting firm Genscape.
Genscape's Colette Breshears noted in a conversation with NGI Thursday that FERC's order affects the planned HDD crossing of Captina Creek for the Clarington Lateral in Belmont County, OH. Any gathering lines connecting farther south via the Clarington lateral could be affected by this order, Breshears said.
"Rover won't have access to any supplies from the Clarington Hub or any receipt points to the west and south of the hub," she said. "...They'll have some supply, but they'll be missing REX, Seneca, Berne, Gulfport, all of their interconnects with Clarington, and they'll basically only have one good receipt point."
Breshears said Genscape, which has conducted multiple flyovers of the Rover construction in progress, viewed the pipeline as at risk of delays even before Wednesday's order.
Rover has beaten expectations with how quickly it progressed in felling trees and other aspects of the project, but "based on our observations of construction progress and the fact that they still have hundreds of miles of pipe to complete -- they're now less than two months away -- based on what we've seen from other pipes, they need to be much further at this point," Breshears said.
Combined with the existing challenges, the order suspending HDD activities "supports a later in-service date" for Phase 1, she said.
FERC's actions in response to the Tuscarawas River HDD spill came just days after a May 5 letter from Ohio Environmental Protection Agency (Ohio EPA) Director Craig Butler asking for FERC’s help in responding to "numerous inadvertent returns of bentonite slurry at a number of locations throughout" the state, including the 2 million gallon Tuscarawas River spill, which affected "a high-quality Category 3 wetland."
Butler told Acting FERC Chairman Cheryl LaFleur that Rover has "taken the position that Ohio has no authority to enforce violations of its federally delegated state water pollution control statutes, water quality standards or air pollution control statutes...Ohio EPA strongly disagrees with Rover's position."
Butler added, "In light of Rover's restarting drilling operations today and Rover's position that the state is without any authority to address violations of environmental laws, we are asking FERC to review the matter and to take appropriate action in the most expeditious manner."
Prior to FERC stepping in, Ohio EPA issued a series of proposed administrative orders in response to the spills that would require Rover to, among other things, develop a wetlands restoration plan and pay a $431,000 civil penalty. An Ohio EPA spokesman told NGI the orders represent the "beginning of the enforcement process" and that they are in response to the Tuscarawas spill and "at least 17 other Rover-related environmental incidents reported to Ohio EPA's spill hotline."
While local media outlets reported that Rover had been fined by Ohio EPA for environmental violations, Energy Transfer spokeswoman Alexis Daniel challenged that characterization.
"There has been a great deal of misrepresentation of the facts as it pertains to this issue," she said in an email. She referredNGI back to the Ohio EPA to "get a clear understanding of the specifics of the situation as no fine has been issued. We continue to work with all regulatory bodies with governance over the project to resolve any outstanding questions or concerns."
In a recent construction update to FERC, Rover said it had received "notices of potential non-compliances" from Ohio EPA regarding inadvertent returns of drilling fluids at three HDD locations.
"The drilling fluid, which is a non-toxic, naturally occurring clay and water slurry that is safe for the environment, was being used to help facilitate HDDs in Ohio," the report said. "Due to the subsurface conditions and other environmental conditions of the locations, the non-toxic clay and water slurry was able to migrate through naturally occurring fractures in the soils and reach the surface.
"It is important to note this is a common and normal component of executing directional drilling operations and once identified, Rover activated its previously approved inadvertent release plan as approved by FERC and other agencies."
Washington, DC-based consulting firm ClearView Energy wrote in a Thursday note to clients that Rover's stance on Ohio EPA's enforcement authority "differs markedly from those taken by other pipeline operators in response to Ohio EPA-identified violations of the same section of the state law." ClearView pointed to a 2014 settlement in which MarkWest paid out $320,000 in civil penalties in 2014 for a release in 2012.
"At this point in the project, Ohio EPA identified 18 releases by Rover, a level that appears to exceed the number of releases for any other enforcement order we reviewed," the firm wrote.
FERC's letter to Rover noted a nearly three-week period in which returns to the drilling rig at the Tuscarawas site were "absent or intermittent." Genscape's Breshears said this was clearly a red flag for FERC, which stated its "serious concerns regarding the magnitude of the incident."
"The question is how did this go so far awry?" Breshears said. "Rover knew that there was something weird happening."
Breshears also highlighted that FERC has directed Energy Transfer and Rover to "preserve and maintain" all records related to the Tuscarawas HDD incident for independent review.
"I think that shows FERC does not have trust in Energy Transfer or Rover to follow the spirit of environmental regulations, as well as the true law," she said.