Marcellus Shale production is strong and activity is high, but because it's a "tough environment to construct in," Williams plans to reduce its capital spending in the play through the rest of this year, an executive said Tuesday.

Rory Miller, president of Williams midstream business, talked with financial analysts about the difficulties of building infrastructure in parts of the Marcellus Shale during a quarterly conference call. Marcellus production was flat sequentially in 2Q2011 at 9 MMcfe/d, but was up 125% year/year. To the end of this year Williams is cutting back on infrastructure spending, he said.

"This is driven by two things," Miller said. "About $100 million of that was a slowdown in the ability to get the capital employed in the Marcellus; nothing amiss there in terms of the production or the wells or the activity. It's just a tough environment to construct in. It's going a little slower than planned. The good news is the well performance is excellent either at or above our expectation. So the resource is good, it's strong. We just had slower construction than we planned. In fact, the first five months we saw a lot of rain and that had a pretty significant impact on our construction."

Miller explained that there's not going to be a reduction in total spending in the Marcellus "but we're just pushing about $100 million into the 2012 time period..." In addition, "we had another unidentified business development project for about $50 million that again still looks very favorable but that was pushed into 2012 as more likely the time of expenditure."

In the Marcellus the company's master limited partnership Williams Partners LP is building the Springville gas gathering pipeline, which ultimately is to have a capacity of 1.25 Bcf/d. The 24-inch diameter, 33-mile pipe when completed will connect to the partnership's Transco interstate gas line in northeast Pennsylvania.

Williams also is awaiting completion of a gas pipeline under way by Laser Northeast Gathering Co. LLC, which began building the Pennsylvania portion of its Susquehanna Gathering System earlier this year (see Shale Daily, Feb. 3). The first phase of the system, which is set to be online by the end of September, is to run about 30 miles from Susquehanna County to Millennium Pipeline in Broome County, NY (see Shale Daily, July 15).

Marcellus output is now about 70 MMcf/d with eight rigs expected to be running through 2012, Miller said. Production could be higher if the first phase of Laser's project were completed. Another 30 MMcf/d is backed up in Westmoreland County, east of Pittsburgh.

"We have said the Marcellus will grow to around 20% of our volumes as we move forward," said CEO Alan Armstrong. The shale plays are creating "a lot of emerging bottlenecks in a lot of different places" for pipelines. "A lot of infrastructure is required in the field and we are keeping our eye on that...As that grows, and we think it will, we continue to see the need for infrastructure" in some of the oily shale plays, including the Bakken "as well as on propanes and heavies [NGLs], the petrochemical business in general. There's been a lot of shifting in light NGLs, [natural gas liquids], heavy NGLs, olefins products. It's positioning us for a big shift."

Randy Barnard, president of Williams gas pipeline business, said he has been "encouraged" by the buildout to date of infrastructure across the Marcellus. "Producer-driven projects are evolving to recognize the differing geographies of source and supply, timing, and various service needs," he told analysts.

"As the Marcellus grows, the reversal of flows on Transco are within the plumbing there. Marcellus production is outstripping demand...and Atlantic access offers firm backhaul opportunities into Transco Zone 5, which is the fastest growing today. There's lots of power generation coming on, firm backhaul opportunities into Transco Zone 5...and so it would be a firm transportation backhaul into Zone 5, with some secondary rights into Zone 6. And that would take their delivery points all the way down to the Georgia-South Carolina border at the end of Zone 5 Transco," which could then pick up supplies from the liquefied natural gas (LNG) facilities at Elba Island LNG and Dominion Cove Point "and everything in between."

In related news Armstrong said the company continues to "evaluate all options" in an attempt to merge with Southern Union Co., but he declined to offer additional details. Southern Union in July agreed to Energy Transfer Equity LP's $5.7 billion cash-and-stock offer, which topped Williams' last bid of $5.6 billion (see Shale Daily, July 20). ETE launched its bid for Southern Union in June and has been vying with Williams since then to create the largest natural gas pipeline franchise in the United States. When asked whether a higher bid possibly was forthcoming, Armstrong answered, "We'll certainly be a disciplined buyer."