The plethora of natural gas from the Marcellus Shale has created an identity crisis of sorts for the nation's pipeline systems, with organic opportunities for the bedrock pipes to the Northeast, a shift in direction for others, and new markets for all, according to a top analyst with Moody's Investors Service.
Rapid growth in production from the Marcellus is rearranging how gas pipelines flow across a big swath of North America as flow shifts and new demand emerges from coal-to-gas power plants and potential liquefied natural gas (LNG) exports. Senior Vice President Mihoko Manabe was lead author for "North American Natural Gas Pipelines: Retooling as Gas Flows Shift, New Demand Emerges from LNG and Power." She talked recently with NGI.
The redrawn pipeline map isn't a new story; the Appalachian Basin markets over the past four years have moved from gas takers to gas makers. What has changed are the business opportunities and challenges for pipelines that had been carrying gas to the Northeast, Manabe said.
"The biggest hurdle is the competition among themselves," she said. "Everyone wants to get out of Appalachia every which way."
After basis collapsed and excess capacity developed on some lines in the Marcellus region, "we're finally starting to see demand beginning to materialize. There's been an recent uptick in open seasons, turning into real committed projects that will bring revenues in a few years."
Moody's reviewed a peer group of pipelines in different regions across North America, describing how they are faring amidst the changing gas flow dynamics, including Spectra Energy subsidiary Texas Eastern Transmission LLC; Williams' Transcontinental Gas Pipeline Co. (Transco) and Northwest Pipeline GP; Kinder Morgan Inc.'s Tennessee Gas Pipeline Co. and El Paso Natural Gas Co.; Boardwalk Energy Partners LP's Texas Gas Transmission; TransCanada Corp.'s Canadian Mainline; Berkshire Hathaway Energy's Northern Natural Gas Co; Rockies Express Pipeline LLC (REX); and Natural Gas Pipeline Company of America LLC (NGPL).
Expansions offer the biggest opportunities for the "traditional" Northeast market providers. There's a lot of expansion and greenfield activity along the Eastern Seaboard, where pipeliners have "many more organic opportunities than the Midwestern pipes," said Manabe. "New England, the Mid-Atlantic states, around the Carolinas, see some greenfield activity."
One greenfield endeavor is a 465-mile pipeline to transport gas into Florida by Sabal Trail Transmission LLC (see Daily GPI, Nov. 5, 2013; July 29, 2013). Another is a joint request for proposal by Duke Energy and Piedmont Natural Gas, with an initial capacity of up to 900 MMcf/d (see Daily GPI, April 1). Spectra Energy has proposed the 427-mile Spectra Carolina Project, which would extend from Texas Eastern’s Station 220 in Pennsylvania to a Duke facility in North Carolina, in direct competition with Transco. It possibly may interconnect with the requested Duke-Piedmont pipeline
"We'll see what comes out of that Duke-Piedmont project," Manabe said. "We should be hearing about that later this year."
Many of the latest brownfield proposals have more manageable price tags than the billions spent on greenfield projects that were constructed several years ago. These recent retooling projects involve adding compression and looping to existing lines and usually entail limited execution risk and time to undertake.
"Project execution risk tends to be lower, now that many of them are of a brownfield retooling variety and can be completed in a couple of years," Moody's analysts said.
"Since Marcellus production began ramping up in 2007, less gas is traveling over long distances on the traditional paths from production areas, the largest being the Gulf Coast and Western Canada, to major markets, mostly on the two coasts and around the Great Lakes. The declines have been met with a rise in shorter-haul paths from new supply areas or along new pipes, such as Marcellus to the Northeast and out of the Rockies."
Moving from longer routes to shorter hauls isn't a "bad thing if the pipeline has found a new replacement market closer by. With the Marcellus meeting more northeastern demand, Gulf Coast supplies are being routed to the Southeast, where the new demand for gas-fired power generation is the greatest. Massive demand for gas is building south of the border in Mexico, while Canada seeks to monetize its British Columbia shale gas as LNG exports in the next decade."
Reversals from Appalachia include one by REX, which recently completed a binding open season to carry up to 1.2 Bcf/d from Ohio to Illinois (see Shale Daily, April 30). Texas Gas has completed binding offers for a few options to transport gas from Appalachia (see Shale Daily, March 28). If the REX reversal moves forward, it would a positive for NGPL, said Manabe. NGPL has proposed reversing part of its Gulf Coast mainline system; it remains in the nonbinding phase (see Shale Daily, Feb. 19).
The "biggest news" by far, however, is TransCanada Corp.'s ANR north-to-south reversal project, which secured almost 2 Bcf/d for the Southeast Main Line with contracts averaging 23 years at maximum rates (see Shale Daily, March 31).
"That is very big," said Manabe. "It's 2 Bcf/d of contracted [capacity] already signed. And they're going to start service before the end of this year...There is competition to get the contracts for interested shippers out of that region."
Whether more pipeline projects are going to be offered depends on "how these binding seasons go," she said. "ANR took care of a lot of demand with those signed contracts. We'll see if NGPL proceeds to a binding open season. We've yet to hear from REX about what became of their recent binding open season. And we haven't heard the results from Texas Gas of their effort."
REX "faced a challenge to their fundamental investment proposition," which had been built to move gas from the Rockies to eastern markets, said Manabe. The pipeline officials were "given some time to do something about it because it has about an average of six years left on their contracts..."
Length of transport on long-haul pipelines has declined over the last seven years, but Moody's expects hauls may lengthen again from these reversal projects. And everybody's looking for long-term contracts.
"It’s also a very positive sign that some of these new contracts…are really long contracts. The ANR project has an average of 23 years on their contracts. For the Texas Gas Ohio to Louisiana proposal, the average contract is 13 years. These are very attractive, contract tenors, from a credit standpoint, in the revenue visibility that these contracts provide."
Appalachian gas supplies are roiling markets east and in the Midwest, but West Coast pipes are "fairly insulated...They do have the Rockies close by. They have gas from Canada, the Permian…So the dynamics are different west of the Mississippi."
Changing the gas pipeline routes from Appalachia are "projects that are quick to market, low-hanging fruit so [operators] really have to seize these opportunities when they can in the competition for new contracts...That's why we're seeing these reversal projects now," versus the bigger-ticket natural gas liquids takeaway pipes.
"The exciting thing for the producers is the new potential customers along the Gulf Coast. These are new customers from the industrial renaissance that's taking place on the Gulf, the manufacturing, petrochemicals, what have you. These are new customers, and that's why they want to get the gas out there."
The major interstate pipes in the East all are connected to Gulf Coast areas hosting LNG export projects. Moody's estimates that the Sabine Pass LNG project in Louisiana will consume about 850 Bcf a year, needing more gas than the largest local gas distribution utility in the United States, Southern California Gas Co.
As well, the potential for gas pipeline growth into and out of Mexico "is just fascinating," said Manabe. "They have 10 concessions that the government is going to bid out this year. A couple of them are going to go over the U.S. border to Waha."
Mexico's promised energy reforms have become reality.
"It seems that the reforms that the new president pushed forward swiftly. The laws have been passed. The rules are being written. I think that’s giving a lot more certainty to existing and potential foreign, private investment, in Mexico...Even along the border, inside the U.S. border, El Paso Natural Gas, for example, has made relatively modest investments just to increase its lateral capacity along the border. It’s been an inflection point of demand for them."
Across North America, the "hum of commercial activity demonstrates the major pipelines' good track record in navigating changing markets with new services, and their ability to manage any stranded asset risk posed by excess capacity and underutilization."