With energy demand high and producers climbing over each other in the Marcellus Shale region, the Northeast remains "ripe with bottlenecks," and it's likely to get more congested before natural gas infrastructure is completed, Williams CEO Alan Armstrong said last week.
The Tulsa-based energy infrastructure company, whose assets include a stable of natural gas pipelines held through Williams Partners LP, is more than ready to help in the build-out across the United States, both onshore and offshore, Armstrong said Wednesday at Barclays Capital CEO Energy-Power Conference in New York City.
"I don't think it's any secret today" about North America's natural gas supply growth," he told the audience. Although Williams early this year spun off its volatile exploration and production arm to concentrate on gas midstream and pipeline opportunities, what it takes to produce hasn't been lost (see NGI, Dec. 5, 2011).
"We saw how much costs were continuing to lower in our operations, but also those producers that we work alongside and provided midstream services" were seeing lower costs and lower prices for gas. "Today I would tell you that's no secret, and I think broadly the market understands that. What's changing, I think, though that is perhaps not all that well understood, is how much the demand side is starting to pick up and the kind of investments that are going into the demand side that people keep wondering where that demand is," he said.
"Today you have this short-term phenomenon, that's completely price-driven, where natural gas is butting its way into the short-term markets and it's completely price sensitive on the coal side, on the power generating side, that we've seen this summer that's helped to balance the market a little bit.
"But the kind of demand growth that we're seeing is really based on big, long-term capital investment. And so it's big power generation. It's steel plants. It's fertilizer plants. And we are seeing a tremendous amount of interest and growth along our big interstate pipeline that we think is probably a couple years out from really showing itself. Once all that capital is investment, that's very sustainable demand growth."
On one side is the supply growth. On the other side, said Armstrong, is demand growth. In between is "a lot of infrastructure," not only from "these great natural gas resources, but...the natural gas liquids that will be coming off of this and...the petrochemical industry that's expanding rapidly as well...The industry fundamentals are very favorable for our business."
Independent producers rarely are given credit for what they've done to continue to lower the costs and increase the productivity of their drilling operations, he noted.
"They really are presenting the U.S. today with a great value opportunity, but it is going to take a lot of infrastructure and a lot of regulatory hurdles to get through to get that infrastructure built out...I do think there's a question around who's going to win all the opportunities amongst the big midstream players," he said. "We've had a long-term strategy for quite some time on the infrastructure space that we really believe that long-term it's going to be the players that have the large scale, most efficient, most reliable assets that are going to win in these basins.
"There's a couple reasons for that. One, of course, which is fairly obvious, is when you have large scale in a basin, you generally have the low unit costs. So, you're able to continue to attract more and more business but I think something that a lot of people tend to overlook and we think is extremely critical is that when you have large-scale operations, you have enough volume to attract new markets and to build the infrastructure for new markets.
"And so, if you think about in a historic fashion, if you think about Opal, WY, where Williams is the largest processor there at Opal, we didn't get there by just all of a sudden having all the supply show up on top of our processing plant. We got there by providing the best market access for both gas and liquids for that basin and it continued to attract volumes into our system and that continued to propel our growth. The same story is happening now in the Marcellus and the Utica, where the producers are going to have to have the best market access and the lowest cost services there to continue to propel that basin..."
But "it's not easy up here," said Armstrong."We've learned a lot of lessons. We started up here with our acquisition in April '09, our acquisition of Atlas' little gathering system up here that's now Laurel Mountain Midstream" (see NGI, Nov. 1, 2010). Chevron Corp., which acquired Atlas, has since become Williams' partner. "And that was flowing about 60 MMcf/d of production when we acquired that and today we're at a little over 1.2 Bcf/d. Our charts can't quite keep up with how quick our growth...and we have over 1.2 million acres dedicated in this region..."
It's the producers that have done the work to keep the economics in check in the region, said the Williams CEO.
"Frankly, the real challenge up here continues to be getting the infrastructure. It is not getting the wells drilled up here that's a challenge. It's getting the infrastructure built out and any of the producers up here that have been up here and operating will tell you that. One of the things that we're really proud of and I think distinguishes us a bit is we haven't really built this from a ground-up basis. We've been building out very large scale facilities, planning on the future."
"If you're building it just one stick at a time, one well at a time, you...build one system, it pressures off the next well. You drill another well. It pressures off those two wells. We're outbuilding very large scale facilities well in advance of when it's needed to. So, for instance, at our Shamrock compressor station, even though the initial need there was only about 4,000 hp, we designed and installed air permitting and capacity to put in about 30,000 [hp] to be able to handle about 1.5 Bcf/d there at that facility.
"So, a lot of the big capital that we've been investing over the last couple years there really positions us for tremendous growth and now the job we have to do is connecting the wells into this large backbone of infrastructure that we've built, not constantly having to loop and recompress because we've got a lot of that big expansion already doing. But I will tell you that this area is ripe with bottlenecks."
Last summer the Tennessee Gas Pipeline bulk gas was trading under $1/Mcf when capacity was strained, Armstrong noted. Williams' premier gas transport machine, Transcontinental Gas Pipe Line LLC -- Transco -- carries supplies up and down the Eastern Seaboard. Its Leidy pipeline runs through the middle of Pennsylvania. It's the "next I will tell you in that in terms of being constrained," Armstrong said.
However, Transco has two major expansions underway now that should help with the Marcellus bottlenecks. The Northeast Supply Link project is coming on and the Atlantic Access project, a second Leidy expansion, is to be in northern Pennsylvania (see NGI, Aug. 6). Williams is in the process of "firming up the contracts with the shippers for that project."
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