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Appalachian Midstream Market Still Holds Coveted Benefits Amid Downturn

Despite a downturn in oil and natural gas prices and the drop in drilling activity across the country, midstream companies both large and small are still committed to entering or building their positions in the Appalachian Basin given the need to push natural gas supplies from the region.

This was the clear consensus among several speakers at an industry conference in Pittsburgh late last month. While the slowdown is anticipated to create a marginal dip in near-term production from the Marcellus and Utica shales, development in Ohio, West Virginia and Pennsylvania is still expected to be robust even as the balance of a supply push and a demand pull remains lopsided.

Midstream companies continue to line up to push the region's growth and help meet the eventual demand for more natural gas from the region, with new players recently entering the basin, others laying the groundwork for growth and opportunities increasing as more producers look to ditch their midstream systems in favor of focusing on core exploration and production activities.

"We've been trying to get into the Marcellus for quite sometime -- who wouldn't be?" Howard Energy Partners CEO Mike Howard told a crowd at the DUG East Conference & Exhibition. "You go from about 2 Bcf/d of production back in 2009 to nearly 20 Bcf/d of production today. There's a lot of midstream companies up here getting companies to that growth."

More specifically, Energy Information Administration data shows that production from the Marcellus Shale alone went from 1.7 Bcf/d at the beginning of 2010 to a combined 19 Bcf/d from the Marcellus and Utica shales last month.  John Staub, a team leader in the EIA's Office of Petroleum, Natural Gas and Biofuels Analysis said despite a slight dip in the region's production forecast, the basin is projected to continue its dominance in U.S. natural gas production in the coming decades (see Shale DailyJune 24). Between 2014 and 2040, Staub said the Marcellus is projected to produce 147 Tcf of natural gas, in addition to 27 Tcf from the Utica.

In March, Howard Energy purchased natural gas gathering assets from Southwestern Energy Co. in northeast Pennsylvania's Bradford and Lycoming counties for $500 million to enter the Marcellus (see Shale DailyMarch 19).

"With the downturn in prices, what we've seen is that there are opportunities where companies don't want to own pipelines anymore," Howard said. "They would rather get to what their core expertise is, which is drilling wells and finding new ways to extract hydrocarbons out of the ground cheaper, using better technology."

Howard was established in 2011 and now owns more than 700 miles of natural gas pipelines, processing and storage plants and related assets primarily in South Texas. But Howard said the company's strength is greenfield projects. And while the northeast poses geographical challenges compared to flatter land in the south and southwest, it's also interested in serving Utica dry gas production too, he said.

Capacity and market constraints in the Northeast have resulted in steep basis declines. As a result, since 2014, Howard and others presenting at the conference said more than 15 Bcf/d of incremental takeaway capacity has been announced to serve the Appalachian Basin.

Magnum Hunter Resources Corp. CEO Gary Evans, who announced at the conference that his company would sell one of its paramount assets in midstream subsidiary Eureka Hunter Holdings LLC, said such a divestiture would be easy given the level of interest in the Appalachian Basin from companies across the country (see Shale DailyJune 25).

Evans said the company, along with its partner in the 175-mile pipeline system that straddles Ohio and West Virginia, are hoping to get $1.2-1.3 billion for the asset. While he added that negotiations were ongoing with a small group of potential buyers, he told conference attendees that the system would likely go to a large, well-capitalized and well-known midstream player.

Conference attendees and speakers also noted some of the higher-level deals that have played out in the region in recent months and years. Of particular interest was Energy Transfer Equity LP's (ETE) more than $50 billion bid to acquire Williams last month (see Daily GPI, July 8;June 22;).

Williams rise in the Northeast began in 2009, said Senior Vice President of Northeast Gathering & Processing Jim Scheel. At the time, the company had just 30 employees in the area, 1,000 miles of pipe and 100 MMcf/d of gas deliveries. Today, the company has 6.3 Bcf/d of gas deliveries and more than 1,100 employees, along with 300 compression facilities and natural gas processing capacity in the region.

What's more, the company's 10,200-mile Transcontinental Gas Pipeline (Transco) has grown to 10.2 Bcf/d and is projected to hit 18 Bcf/d by 2017, he said.

Acquiring Williams would give ETE Transco and allow it to integrate the system into its Rover Pipeline, which is being developed to deliver Marcellus and Utica shale gas to markets in the Midwest, Great Lakes and Gulf Coast (see Shale Daily, Oct. 31, 2014). When the news of ETE's acquisition offer broke, financial analysts noted that it has been "increasingly aggressive in expanding Northeast assets."

Similarly, when Devon Energy Corp. partnered with Crosstex Energy Inc. to form Enlink Midstream last year, it enhanced a liquids-oriented growth profile with additions in the Marcellus and Utica (see Shale DailyMarch 10, 2014). NiSource Inc. also recently separated with its Columbia Pipeline Group, mainly to leverage billions of dollars in growth plans in the Appalachian Basin (see Shale DailyMay 15).

Scheel said that while a supply push is still ongoing, natural gas demand is slowly increasing. Currently, he said Williams has 8.3 Bcf/d of new takeaway that's in service, under construction or being negotiated. Meanwhile, Howard Energy has contracted to build out a gathering system for Southwestern on developing acreage in Tioga County, PA, and it has submitted requests for proposals (RFP) on other projects in the region. Enlink also holds a 30% stake in the company.

"If demand...is going to increase another 20 Bcf/d over the next five to ten years just in the Northeast, there's going to be more bottlenecks that are found and more infrastructure that's needed," Howard said. "So, we're throwing our hat in the ring. We're in business now in the Northeast; we have a very strong partnership with Southwestern; we're working on some RFPs with others and looking to grow this position."

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