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Chesapeake to Anchor Marcellus-Gulf Ethane Pipeline

A frequent customer of Enterprise Products Partners LP in several shale play infrastructure projects, Chesapeake Energy Corp. has stepped up to be the anchor shipper on the partnership's proposed pipeline to carry ethane from the Marcellus and Utica shales to the U.S. Gulf Coast.

The pipeline, which would use existing and new infrastructure, would link what are arguably the most promising liquids-rich gas plays with the nation's traditional ethane marketplace.

Chesapeake claims the distinction of being the most active driller and largest leaseholder in the Marcellus and Utica. The company committed to supply 75,000 b/d of production over a five-year ramp-up period, said Chesapeake's James Johnson, senior vice president of marketing. "We view providing a major commitment in support of this project as an important step toward obtaining premium pricing for the significant volumes Chesapeake will produce from this resource," Johnson said. The producer has the option to take additional capacity.

An open season for the project is under way through Nov. 10.

"We've been laying the groundwork for this project for a while now, and we believe new developments continue to point to the growing strategic importance of this project to both the Northeast producer community and Gulf Coast petrochemicals," Enterprise COO Jim Teague told financial analysts Wednesday during a third quarter earnings conference call. "Producers continue to not only beat expectations in the Marcellus but recently also announced impressive acreage positions and drilling intentions for the nearby Utica, which is also expected to be rich in NGLs.

Teague said Enterprise's "conservative estimate" is that more than 400,000 b/d of incremental ethane supply will be needed for ethylene expansions, debottlenecking and plant feedstock conversions over the next several years. Much of the expansion and conversion demand is expected to be created over the next 12-36 months, he said, as petrochemical companies increasingly turn to domestic ethane over naphtha, for instance. "We have also built facilities to serve the petrochemical industry on the Gulf Coast as it continues to expand its demand for price-advantaged domestic ethane to displace more expensive imported crude oil derivatives," said Enterprise CEO Michael Creel.

"On the demand side, petrochemical companies continue to be focused on significant expansions in the U.S. because of the favored feedstock costs from growing shale reserves, primarily ethane. We believe these Northeast NGLs are now key to realizing the growth potential for the Gulf Coast-centric petrochemical industry," Teague said.

Following a recent open season, El Paso Midstream Group decided to slow its plan for a pipeline system to ship ethane to the Gulf Coast (see Shale Daily, Oct. 25). MarkWest Liberty Midstream & Resources LLC and Sunoco Logistics LP recently announced a successful open season on Project Mariner West to connect the Marcellus Shale to Sarnia, ON, by pipeline and are planning Project Mariner East to move Marcellus ethane across Pennsylvania where it would be carried by tanker to the U.S. Gulf Coast or Europe (see Shale Daily, Sept. 8).

The approximately 1,230-mile pipeline proposed by Enterprise would have initial capacity of 125,000 b/d of ethane and could be expanded with additional pumping horsepower and pipeline looping. The committed shipper transportation rate would range between 14.5 cents per gallon and 15.5 cents per gallon, Enterprise said.

Through connections at the partnership's natural gas liquids (NGL) storage complex in Mont Belvieu, TX, ethane production from the Marcellus and Utica shales would ultimately have direct or indirect access to every ethylene plant in the United States. The pipeline could begin commercial operations in the first quarter of 2014, according to Enterprise.

The ethane pipeline is one example of an Enterprise strategy that Teague said has long been in place at the partnership: "What we build or buy has to fit what we already have."

Enterprise reported record gross operating margin of $973 million, record adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) of $956 million and record net income of $480 million for the third quarter, compared with gross operating margin of $809 million, adjusted EBITDA of $838 million and net income of $348 million for the third quarter of 2010.

"Enterprise reported record results again this quarter driven by natural gas, NGL and crude oil production growth in the shale regions, as well as demand for NGLs by the U.S. petrochemical industry and global markets," said CEO Michael A. Creel. "Our NGL pipelines and services segment posted record gross operating margin this quarter, while our onshore natural gas, onshore crude oil and petrochemical service businesses also had strong results.

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