As natural gas production steadily increases in the Utica Shale and a new joint venture (JV) emerges to handle midstream services, the business model for Dominion East Ohio (DEO), whose operations run through the heart of the shale play, is forecast to change in some areas, but not in others.

In an exclusive interview with NGI's Shale Daily, Jeff Murphy, DEO managing director of commercial operations, said the company will likely continue to gather some gas and expects some of the increasing Utica production to be sold in its marketplace. But he emphasized that DEO will continue to serve its end-use customers first, even as it looks to become a larger player in the processed gas service business.

"One of the things that DEO has to balance, frankly, is the fact that we've been a gatherer of conventional production for literally more than 100 years," Murphy said Wednesday. "We will be looking to continue to service that part of our producer market alongside the shale producers."

Last December, Dominion and Caiman Energy II LLC formed Blue Racer Midstream LLC, a $1.5 billion JV to provide midstream services to gas producers operating in the Ohio and Pennsylvania portions of the Utica (see Shale DailyDec. 24, 2012). Dominion contributed 500 miles of DEO's existing gathering lines operating in the heart of the Utica to the JV, as well as the Natrium Processing Plant in West Virginia.

"One of the things that DEO will continue to offer, with the gathering predominantly offered by Blue Racer, is residue gas service," Murphy said. "But DEO can continue to provide dry Utica gathering, as well as residue gas service after the gas has been processed.

"That gas needs to go somewhere, and much of that will find a home behind our market. Other portions of it may well be transported off to an interstate pipeline."

In August, Gulfport Energy Corp. executed a firm 10-year transportation agreement with DEO and Dominion Transmission Inc. for up to 100,000 Dth/d of processed gas originating from MarkWest Utica's Cadiz processing complex for delivery to the ANR pipeline at Lebanon, OH, via DTI's interconnection with DEO at Harlem Springs, OH.

"We have additional capability beyond that, and we'll be looking to utilize that for other parties as well in the future."

Murphy said that despite the formation of Blue Racer late last year, DEO will likely continue to gather some gas.

"Not all gas, frankly, that is conventional production today lends itself to processing," he said. "There may also be some wells tied into our system today that wouldn't necessarily have a path to processing. And so, just as we do today, that gas would come in and serve market behind our system here.

"We have a lot gathering assets, and some will certainly remain with DEO. Some former transmission pipelines, or trunkline gathering systems, would be the kind of assets we would transfer into the Blue Racer JV. They would then have ownership and operational control over those assets once a transfer takes place."

Blue Racer is operated by Caiman Energy. Murphy said the JV is effectively fully operational today. He added that although the Natrium facility is located in West Virginia and the bulk of the JV's gathering assets are in Ohio, the system is not regulated by the Federal Energy Regulatory Commission because of the gathering exemption under the Natural Gas Act.

Utica Bumping Up Conventional

Murphy said that historically, about 20% of DEO's throughput has come from conventional production in Ohio, primarily from the Clinton formation.

"Obviously, that is going to change dramatically with the shale revolution here in the Utica, [but] some of that gas we fully expect to stay on our system and be sold into our marketplace," he said, adding that DEO bundles its gathering, transmission, storage and distribution costs into its in-state distribution rate for end-use customers. "Other parts of that production, which may be coming off either the wells themselves or, more likely, from the processing plants, would likely be transported on our pipelines off to interconnections that we have with interstate pipelines.

"DEO already looks a lot more like an interstate or intrastate pipeline than many LDCs [local distribution companies]. We have gathering assets and transmission assets, as well as storage that we operate alongside our distribution assets. The fact that we now have additional Utica production coming on does change things, but it's not a 180-degree change by any means."

Murphy added that although DEO may not be a typical LDC, its end-use customers will always come first.

"It's not an 'either/or.' The greater the demand is during critical periods, the greater our need is for supply. And so as a result, that supply could be interstate gas production; it could be shale production being delivered into our system. They're not mutually exclusive by any means.

"We have a demand side. That demand side is the most critical part of our business, that's our jurisdictional customer. But the supplies coming into the system could come from a wide variety of sources, and Utica production certainly could be a very key source for us, even during peak supply periods."

Asked if DEO has an estimate for how much Utica production could grow, Murphy said the company "is looking at the same forecast that most likely everybody else is.

"I think it's pretty clear that it will be well over 0.5 Bcf/d certainly by early next year. As you look to the end of 2014 we're likely to see a break of the 1 Bcf/d barrier, and we're probably heading up to 2 Bcf/d within several years."

On the issue of storage, Murphy said DEO probably wouldn't lease out storage so much as it would sell storage service, adding that the company already offers unbundled storage service among its tariff offerings.

Storage Adopts Traditional Role

"If you look at the market today for storage, it's predominantly driven by seasonal price spreads," Murphy said. "Our sense is, down the road, the market may well be driven by the producers' need to have a home for their production when that seasonal demand declines during the warmer months. Certainly power generation is going to be a big market, but even at its peak, at least on our system, it's not going to create the kind of peak days that you're likely to see during the winter.

"The demand for storage service may change from something that's more of an economic play on the price spread side to an economic play driven by the producers' need to find a home for their gas during those more low-demand periods. We would certainly welcome additional demand for our storage service, be it from producers or marketers that may be buying their gas."

Murphy said DEO's rate structure for its gathering and intrastate transmission lines is predominantly open access. After the company opened its system to energy choice in October 2000, "our market quickly grew to something today that is virtually entirely transportation service.

"DEO is not in the commodity market, and frankly hasn't been since 2006. As a result it is, for the most part, an open-access type of model with respect to our services being more 'fee for service' rather than any kind of a commodity-driven type of structure."

Murphy added that DEO's transmission lines are effectively all open to third-party transportation activity today. The company effectively exited the regulated merchant function in 2006 after several auctions overseen by the Public Utilities Commission of Ohio (PUCO) to supply DEO's non-residential customers.

"Ever since that time, we've really no longer been in the traditional commodity business," Murphy said. "Marketers, producers and the like pretty much dominate all of the gas flowing on our system then and now. So in one sense, it really doesn't change much of anything in terms of the open access character of DEO."

According to the PUCO, DEO's service area includes at least part of 35 counties in Ohio. Ten of the 35 counties are in the western part of the state and were formerly serviced by Dominion West Ohio, while the remaining 25 are in the eastern part of the state.

Those eastern counties include the current Utica hotspots of Belmont, Carroll, Columbiana, Harrison, and Noble counties, among others. As of last year DEO estimated the company gathered about 83% of Ohio natural gas production.

Dan Donovan, spokesman for DEO, said the cities of Akron, Canton, Cleveland, Lima, Marietta and Youngstown are included in DEO's utility area.

Donovan said DEO currently has 1,075 miles of large-diameter transmission pipeline, but that includes 125 miles to be transferred to Blue Racer. He said additional miles of transmission pipeline will also be transferred before the end of the year. DEO also has 972 miles of gathering pipelines, and 21,000 miles of distribution pipelines, all in Ohio.

 DEO's parent company, Richmond, VA-based Dominion, is one of the largest energy producers in the United States, producing about 23,500 MW of electric power annually. It is also the country's largest gas storage operator and one of the largest transporters of energy, with 11,000 miles of natural gas transmission, gathering and storage pipelines, and 6,400 miles of electric transmission lines.