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 interview with NGI, DEO’s Jeff Murphy, 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. “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 joint venture (JV) to provide midstream services to gas producers operating in the Ohio and Pennsylvania portions of the Utica (see NGI, Dec. 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 (see NGI, Aug. 26).

“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. (DTI) 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 despite the formation of Blue Racer, DEO will likely continue to gather some gas. “Not all gas, frankly, that is conventional production today lends itself to processing. 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.”

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.

Murphy said 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.”

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

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.<

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.

DEO spokesman Dan Donovan said the cities of Akron, Canton, Cleveland, Lima, Marietta and Youngstown are included in DEO’s utility area. He said DEO currently has 1,075 miles of large-diameter transmission pipeline, including 125 miles to be transferred to Blue Racer, and additional miles of transmission pipeline are to 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 also has the country’s largest collection of gas storage facilities, operating 18 storage fields with 480 Bcf of working gas capacity. Dominion has 7,821 miles of natural gas transmission lines in six states.