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Producer Expects Marcellus Pipe Constraints to Lessen, Eventually

For the time being at least, Marcellus Shale producers are paying the price for too much of a good thing. Concentrated development in the nation's preeminent shale gas play has made for basis-inverting constraints on Tennessee Gas Pipeline. However, the industry has seen this sort of thing before (in the Rockies more than once, for instance), and the market will work it out, eventually, a Marcellus producer told NGI's Shale Daily.

The capacity constraint-induced price compression started happening in earnest after the Fourth of July weekend. Gas nominated into Tennessee's 300 leg in the key Marcellus producing counties of Tioga, Bradford and Susquehanna has been trading on average between 50 and 65 cents below the Henry Hub so far this month, with a handful of deals trading close to $2.00 below the Henry Hub. Of course, historically gas in northeast Pennsylvania has traded at a premium to the Henry Hub.

"What we have is very rapid production and development in a very concentrated area, which unfortunately is on the very smallest pipe that exists in Pennsylvania," Rodney Waller, Range Resources Corp. senior vice president, told NGI's Shale Daily.

Four counties in northeast Pennsylvania accounted for about 65% of Marcellus production last year, he said. Add to that two counties in southwest Pennsylvania -- Washington and Greene -- that accounted for 23%, for a total of 88% of the play's production coming out of six counties, Waller observed. "So anytime you have that much concentrated development, you're going to outgrow the infrastructure."

Range is mainly active in southwest Pennsylvania, which also is experiencing constraints, but Waller has his eye on all of the Marcellus.

Tennessee's 300 Line runs west-east across Pennsylvania, and gas appears to be backing up at key receipt and delivery zones along the line. For gas flow day July 19, capacity ran 85% full at the 611 MMcf/d design capacity Compressor Station No. 321 in Susquehanna County and was completely booked at the 595 MMcf/d capacity Compressor Station 315 in Tioga County. Several smaller receipt and delivery points also were at 100% or more of capacity. The biggest disconnect was at the 76 MMcf/d design capacity Teel Dehydration plant in Susquehanna County, where shippers scheduled 412 MMcf/d of gas flows (see chart).

The Line 300 issues in the pipeline's Zone 4 have spread to Tennessee's Zone 6 as well. According to IntercontinentalExchange data, the discount of Line 300 deals to Line 200 deals within Zone 6 has risen steadily over the last 10 days or so, from 5% on July 7 to 25% on July 18. Line 300 extends from Zone 4 in Pennsylvania through New Jersey, New York and Connecticut, where it reconnects with Line 200 at the Connecticut-Massachusetts border.

Of course, the situation has not gone unnoticed, particularly not by Tennessee parent El Paso Corp. The company has proposed the Northeast Upgrade Project, which would allow an additional 636,000 Dth/d to be transported on the 300 Line in Pennsylvania and delivered to markets in the Northeast. Tennessee proposes to upgrade its existing 24-inch diameter 300 Line by constructing five 30-inch diameter pipeline loops and modifying four compression stations

Williams Partners LP has the 33-mile, 24-inch diameter Springville gathering pipeline, which is currently under construction to connect a northeast Pennsylvania gathering system to Williams Partners' Transco interstate gas pipeline. The partnership said its gathering system in northeast Pennsylvania is expected to ultimately have a capacity of 1.25 Bcf/d.

Laser Northeast Gathering Co. LLC began building the Pennsylvania portion of its Susquehanna Gathering System in February (see Shale Daily, Feb. 3). The $50 million first phase of the system will run 30 miles from Susquehanna County to the Millennium interstate pipeline in Broome County, NY, and is expected to come online in the third quarter (see Shale Daily, July 15).

The Federal Energy Regulatory Commission recently issued a favorable environmental assessment of Inergy subsidiary Central New York Oil and Gas Co.'s (CNYOG) MARC-I Hub Line Project, which would allow for the delivery of Marcellus Shale and Trenton Black River gas to Northeast markets (see Shale Daily, June 2). The project calls for a 39-mile, 30-inch diameter pipeline in Bradford, Sullivan and Lycoming counties plus compression and would have about 550,000 Dth/d of firm capacity scheduled for service in fall 2012.

"Everybody's kind of coming to the rescue and trying to build extensions of pipe to get gas off the system, while Tennessee is trying to build loops and backhauls and other expansions," Waller said. In the meantime, he gave kudos to El Paso for "heroic feats" intended to deal with the Line 300 situation.

"Because of their systemwide gas flows, they've been able to trade 400-800 MMcf/d of gas to various other delivery points on a backhaul traded basis, allowing producers to flow their gas. Again, they make money doing that, but at the same time, if they weren't cooperative in doing that they'd just simply say, 'The pipeline's full; go somewhere else.'"

Because they always are following the money -- in the form of higher returns -- producers will go somewhere else. For instance, noted Waller, earlier this year Calgary-based Talisman Energy Inc. announced plans to reduce the number of rigs it operates in the Marcellus by the end of the year, but it said it will increase development in the Eagle Ford and Farrell Creek shales, which are both liquids-rich (see Shale Daily, Jan. 12).

Marcellus wells are generally expected to have high decline rates over their first few years, with a 70% decline rate being commonly cited by industry officials for the first year. That should help accelerate the maturation of Marcellus production, everything else being equal. Besides the pressure relief of infrastructure projects and capital redirection away from the Marcellus, capacity constraints also should be relieved as the Marcellus play matures and producers expand their activity to other areas of the play, Waller said. "As you spread that development throughout Pennsylvania in the next couple of years, you'll probably smooth out some of that pipeline constraint, but right now you've just accelerated much too quickly the development on a piece of pipe that was already limited.

"If you spend less capital in [Tioga, Bradford and Susquehanna counties] and you spend it in other counties, then you're going to spread the wealth around and utilize the underutilized capacity on other pieces of pipe."

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