With a subsidiary and another producer already claiming 500 MMcf/d of capacity, Dominion plans to launch an open season Monday (July 7) for the proposed Dominion Keystone pipeline to transport up to 1 Bcf/d from southwestern Pennsylvania, the heart of the Marcellus Shale, to East Coast markets.

The pipeline, which would carry gas to Chester County, PA, has Dominion Exploration and Production (E&P) and privately held Antero Resources as anchor tenants. Dominion Keystone would interconnect with pipes operated by Dominion, Spectra Energy, Williams and NiSource to transport the gas to eastern markets.

The project, said Dominion, “is a response to the many Appalachian producers who are seeking reliable natural gas pipeline transmission for increased production from conventional drilling, coalbed methane and Lower Huron Shale, as well as Marcellus Shale.” The open season would end Aug. 12.

Dominion sold most of its E&P assets in several transactions last year (see NGI, Aug. 20, 2007), but it kept its leasehold in the Appalachian Basin. To build its proposed pipeline, Dominion plans to assign its Marcellus Shale gas drilling rights on about 205,000 net acres to Antero for $552 million ($325 million after taxes). Collectively the two customers are expected to provide around 500 MMcf/d, which would allow for transport of up to 1 Bcf/d by year-end 2012, Dominion said.

“Assigning a portion of our drilling rights in the Marcellus Shale has a number of benefits for Dominion,” said Dominion CEO Thomas F. Farrell II. “It allows us to lock in an immediate return from a valuable asset while preserving some upside potential through a royalty interest in future production. Proceeds will help fund our electric and natural gas growth projects. There is already a need for more natural gas gathering and transportation infrastructure in the Appalachian Basin. The Marcellus and Lower Huron plays will increase that demand.”

Dominion would receive a 7.5% royalty interest on future gas output from the acreage assigned to Antero, and it would retain drilling rights in traditional formations both above and below the shale interval. Dominion also plans to continue its conventional drilling program there. The transaction with Antero is expected to close by late September.

The acreage assigned to Antero is principally in western Pennsylvania and West Virginia, and is about one-third to one-quarter of the 600,000-800,000 acres where Dominion controls drilling rights in the Marcellus Shale formation. Dominion said it “expects to pursue similar transactions” for additional acreage. The company has 1.1 Tcf of gas reserves and about 9,000 producing wells in the Appalachian Basin. Dominion said it has not booked any reserves for its Marcellus Shale acreage.

Dominion intends to use net proceeds initially to reduce outstanding short-term debt. Longer term, the proceeds are expected to partially offset some equity issued in 2009.

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