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Greenfield Projects Seen as Key to Relieving Appalachian Bottleneck

The midstream industry is quickly running out of options to meet demand from growing production in the Appalachian Basin, and volumes could be sharply curtailed as a result, said a top executive speaking at Thursday's Northeast Oil and Gas Awards Conference for Excellence in Pittsburgh.

"What we're doing today is trying to take that existing infrastructure and, in large part, leverage what we can by optimizing existing assets and installing bolt-ons to existing infrastructure. As an industry, we're quickly running out of the ability to do that," said Chad Zamarin, COO of midstream services for the Columbia Pipeline Group. "If you look at industry projections over the next 10 years, you see these stair steps that often times are tied to pipeline takeaway capacity. Rationally, we're going to get to a point where production is constrained."

Zamarin's comments are no great epiphany. Last year alone, production in the Marcellus Shale reached 3.3 Tcf of natural gas, and it is expected to reach as high as 4.5 Tcf this year. But while the immense spike in Appalachian production has created enormous opportunities for the industry, Zamarin said the next five years will also present enormous challenges.

Columbia owns and operates about 15,000 miles of interstate natural gas pipeline and moves more than 1 Tcf of natural gas each year. That system, though, is "designed to move gas in a way that's not going to work for us in today's or tomorrow's market," he said.

Zamarin and others at Thursday's conference projected that the basin will need roughly 14 Bcf of gathering and processing capacity in the next five years, adding that even more will be needed in long-haul transmission. The majority of the $30 billion expected to be invested in the region in the next decade or so for midstream infrastructure will be spent in the next five years, Zamarin said.

"Our company was built on this assumption that gas would be cheap and plentiful on the Gulf Coast and very attractive to sell up in the Northeast. This was sort of the fountainhead of energy originally; it dates back to the Standard Oil days," Zamarin said. "Now on any given day, we move seven times to market what the available pipeline capacity to the Northeast is. We do that through storage, and we rely heavily on it."

Although the Northeast remains attractive to producers and midstream companies, despite tightening price spreads there, demand has not grown significantly and Zamarin said his company believes it will remain stable.

Instead, Columbia is focused on liquefied natural gas (LNG) exports to non-free trade agreement countries, which he said represents an 8-10 Bcf/d opportunity for the company. The southeastern United States and a slowly growing power generation market that will rely more heavily on natural gas are also growth targets for Columbia.

Transmission is producer-driven, and demand to market more gas in these arenas is "tremendous," Zamarin said.

In December, Columbia Gas Transmission LLC launched an open season for its Leach XPress pipeline project, which would carry residual gas from production areas along the state lines of Ohio, West Virginia and Pennsylvania to the Gulf Coast. Columbia said the line would initially have 1 Bcf/d of takeaway capacity. Zamarin said the company eventually solicited more than 4 Bcf/d in capacity interest from producers.

"As the gap between Northeast production and peak winter demand diminishes, we're going to see more of a longer-term trend towards Northeast production meeting Northeast supply," Zamarin said. "You should start seeing bigger and more expensive projects because if we don't find a way to build new infrastructure, we're not going to be able to keep pace with production.”

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