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Bluegrass 'Key Piece' of Marcellus, Utica Growth?

Williams executives believe the Bluegrass Pipeline, which would deliver natural gas liquids (NGL) from the Marcellus and Utica shales to Gulf Coast markets, to be a key to unlocking all of the value of the Appalachian Basin's reserves, but exploration and production (E&P) companies still need to provide some details about their drilling plans for assurance beyond 2015, CEO Alan Armstrong said Thursday.

Williams, whose Transcontinental Gas Pipe Line Co., or Transco, carries a lot of natural gas out of Appalachia, is but one system that the Tulsa operator is working in the region. Still, it's difficult to determine what to consider in the medium term, like say, two years out -- forget the longterm -- because of the unrelenting growth and a lack of detail about drilling commitments to ensure infrastructure is in place ahead of the production, Armstrong said.

The top executive and his team spent more than an hour discussing third quarter results (see related story; Shale Daily, Oct. 31). Analysts mostly quizzed the executives on proposed projects, financing and what ifs. A queue of natural gas and natural gas liquids (NGL) projects is in line for construction or ramp up over the next two years. It’s not so much a horse race among projects as it is a matter of due diligence in investigating production estimates and how solid those estimates are.

Many questions and some concerns were about the ambitious Bluegrass Pipeline, a venture with Boardwalk Partners, to carry Marcellus and Utica NGLs south to the Gulf Coast. An open season was launched Tuesday, with a separate offering to build a fractionation (frac) facility and an export terminal (see Shale Daily, Oct. 25). Armstrong didn't sound overly concerned about whether the interest would be there.

"I wouldn't try to tell anybody it's not without risk, because there's a lot of continued infrastructure development to be built out there," he said. "But I would tell you that we feel pretty comfortable with the schedule and the detail that we built behind the volumes at this point. And so it really is kind of a grounds-up review from each of our producers and their drilling plans out there."

The energy industry overall tends to "wait a little too late to get the infrastructure built" in any case," he told analysts. Bluegrass, if it garners enough interest to move forward, wouldn't be online before 2015. "But I certainly think the market has gotten a strong signal from the gas-on-gas competition it saw this quarter, and it seems to be responding to support continued infrastructure development out of the area."

The reason to offer the separate fractionation and export terminal options was simple, Armstrong said.

"We recognize that customers don't want a pipeline to nowhere. And so that's why we've been working so hard at developing both the storage, the terminal and the export facilities...We've got to be able to provide customers with a comprehensive solution. And...the thing I'm fairly encouraged by in that regard is with the discussions we're having on the export side. We're seeing interest in customers wanting to know where that supply is going to come from as well.

"And so I think the market's really starting to come together in terms of the supply side and the demand side. We see that as one of our critical roles in the industry right now is bringing together that strong demand that we're seeing from international players back to our customers on the upstream side, and being the party providing the infrastructure in between.”

Bluegrass faces competition from Kinder Morgan Energy Partners LP and MarkWest Utica EMG LLC (see Shale Daily, Oct. 17).

It might come as a "surprise to some people," said Armstrong, "but my confidence level is not really all that driven at this point by the competition, by the competing project just because we think we're so far ahead in terms of development of the project and details and how far ahead we are in terms of getting project developed...So I would just say that's not really that big a factor, frankly.

"I think the challenge that still remains is producers knowing their drilling plans, being committed to the drilling plans. And so I think we may get a lot of commitment, but we're going to need to be weighing how solid that those volumes will be and how much we can count on those volumes being there. And so that's what we're in the process of doing with the open season."

Williams executives believe Bluegrass is a "really key piece of infrastructure for the Marcellus and the Utica. And we think that it really, really needs to be installed at the end of 2015 to protect our investment on the upstream side and other investments or other more indirect investments that we have up there. So we think it's very important, and we think Bluegrass is the only one that can really meet that kind of time line. So that gives us a lot of confidence.

"But we've got a lot of projects to invest in, and we're going to make sure that it's a sensible investment for us before we start really plowing the big money into it in the first quarter of 2014."

In terms of financing Bluegrass, Williams has been approached by "industry players and financial players that would like to invest in the project, and we may or may not choose to partner with others," said CFO Don Chappel."But beyond that, will be a combination of debt and equity to maintain our credit rating goals, which we have previously consistently espoused as investment-grade ratings."

Of course, Williams has options for financing Bluegrass or putting more NGL expansions on the ground. In addition to the controlling interest in Williams Partners LP, which has infrastructure across the region, last year it sealed the deal in buying half of Chesapeake Energy Corp.'s former midstream partnership, now known as Access Midstream Partners LP (see Shale Daily, Dec. 13, 2012). Williams Partners in 2012 also bought Caiman Eastern Midstream LLC, which gathers NGLs in Appalachia (see Shale Daily, March 20, 2012).

"We certainly look at all the levers that we have to pull as we look at potential financing," Chappel said.Because Bluegrass would be a regulated asset Williams offered in its open season an "intelligent response to the market that allows us a considerably higher rate for people that are just wanting to dedicate acreage but not make volume commitments. And then a very attractive rate to the degree people are willing to make a volume commitment. And there's various steps in between that...

"We basically provided a menu for customers...Once we get all that built into our analysis in terms of those options, then we can decide whether that we think that degree of support justifies the investment and the project...One that gives producer flexibility."

Exploration and production (E&P) companies aren't likely to be key customers on Bluegrass because it's such a big investment, said Armstrong. "Usually, when we have the parties that are wanting to take equity, it's a project that's fairly specific to their needs."

But, Bluegrass is a much different kind of animal. "We've got a variety of different shippers such that it's not enough...Nobody has a dominant position in the pipeline like we've seen on some of those other assets. Having said that, I would tell you there's a lot of interest from more strategic players, I would say, in wanting to have an interest. But it's likely not going to be from the E&P side..."

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