Pipeline Infrastructure Investment Will Soon Eliminate Marcellus Gas Bubble

Several major pipeline projects have been announced in recent months, geared toward moving the natural gas produced in the Marcellus Shale region to markets to the East and South. According to Bloomberg New Energy Finance, as many as ten pipeline projects are in the works that would deliver two billion cubic feet of gas from the Marcellus Shale to the Northeast and Mid-Atlantic. The major announced projects include the following:

  • Atlantic Coast Pipeline: This is a $5 billion, 550-mile project beginning in Harrison County in West Virginia, and continuing to North Carolina and Virginia. It will transport 1.5 billion cubic feet of natural gas per day. Four companies are sponsoring the project: Dominion, Duke Energy, Piedmont Natural Gas and AGL Resources. Dominion, which has a 45 percent stake in the pipeline, will build and operate the pipeline. Construction is expected to start in summer of 2016, with completion expected by late 2018. The pipeline will have a 42-inch diameter in West Virginia and Virginia, and a 36-inch diameter in North Carolina.
  • Diamond East: Williams is proposing to expand its 10,200-mile Transco interstate pipeline to allow more Marcellus Shale gas to head to Transco’s northeast market, including Pennsylvania, New Jersey and New York local distribution companies and power generators. The Diamond East Project is being designed to provide up to one billion cubic feet of new capacity from points in Lycoming and Luzerne counties to Mercer County, N.J. The price tag of the project is estimated to be between $500 million to $800 million.
  • Algonquin Incremental Market: This pipeline upgrade will add capacity of 342 million cubic feet per day. It is being built by Algonquin Gas Transmission and Spectra Energy, and is designed to move Marcellus production to Algonquin City Gates. The shippers are 6 gas utilities in New England.
  • PennEast: This is a $1 billion pipeline project being proposed by AGL Resources, NJR Pipeline Company, South Jersey Industries, and UGI Energy Services. The 100-mile pipeline will be able to deliver up to 1 billion cubic feet per day of lower cost natural gas produced in the Marcellus Shale region to homes and businesses in Pennsylvania and New Jersey.
  • Constitution: This new pipeline, being built by Williams Pipeline, Cabot Oil & Gas, Piedmont Natural Gas, and WGL Holdings, will add capacity of 650 million cubic feet per day, and will connect Appalachian natural gas supplies in northern Pennsylvania with major northeastern markets. The approximately 124-mile pipeline will have a 30-inch diameter, and will extend from Susquehanna County, Pa., to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, N.Y.
  • Atlantic Sunrise: This Williams project would include expanding the existing Transco transmission pipeline by adding new pipeline infrastructure in Pennsylvania, as well as modifying some existing Transco facilities in other states, to allow gas to flow from north to south. The project involves a total of approximately 178 miles of new greenfield pipe, two pipeline loops totaling about 12 miles, two and half miles of existing pipeline replacement, two new compressor facilities in Pennsylvania, and other facility additions or modifications in five states (Pennsylvania, Maryland, Virginia, North Carolina, South Carolina). The project will increase capacity by 1.7 billion cubic feet per day, and is proposed to go into service in the second half of 2017.
  • Leidy Southeast: This 30-mile long pipeline upgrade by Williams will add capacity of 525 million cubic feet per day, primarily to serve local gas distribution companies along the Atlantic Seaboard.
  • Niagara Expansion: Tennessee Pipeline is proposing to add capacity of 158 million cubic feet per day to interconnect the Marcellus Shale in Pennsylvania to its interconnect with TransCanada Pipeline in Niagara County, New York.
  • In addition to these projects located within or near the Marcellus Shale region, there are several projects within the Northeast designed to transport the new gas supplies throughout New England once the Marcellus gas reaches the region.

This substantial infrastructure investment is being driven by the “bubble” of natural gas within the Marcellus Shale region. The production of natural gas within the region exceeds (1) the demand for natural gas within the region and (2) the capability to export gas out of the region, resulting in “trapped” gas within the region. According to NGI’s Daily Gas Price Index, natural gas prices at the Marcellus hub are in the range of $1.93 per Mmbtu versus a “national” price of $3.80 per Mmbtu at Henry Hub. When regional natural gas prices are running about one half of the national price, there is considerable interest in getting the natural gas out of the region and into the more lucrative markets around the country. Hence, the numerous pipeline projects that collectively would move two billion cubic feet of natural gas out of the region. According to the U.S. Energy Information Administration, gas output from Marcellus wells exceeded 15 billion cubic feet per day in July, and accounts for almost 40 percent of U.S. shale gas production.

The geographic shift in supply and demand for natural gas is causing a “re-plumbing” of the system. According to a June 2014 report from Goldman Sachs, 85 percent of the growth in U.S. natural gas production will come from Appalachia, while 60 percent of the growth in demand will come from the Gulf Coast. As a result, Goldman Sachs is projecting $21 billion in pipeline investment to move natural gas from the Marcellus Shale. $16 billion of that investment involves reversing the flow of existing infrastructure, i.e., moving the gas to the Southeast, which formerly got most of its gas from Louisiana, Texas and Oklahoma. One of the big markets for gas from the Marcellus Shale is New England, where the percentage of electricity generated from natural gas has increased from 30 percent in 2001 to 52 percent, without any new pipeline capacity being built during that period. As a result, the price of natural gas delivered to New York City hit $123 per Mmbtu in early January 2014 when temperatures dropped to 7 degrees.

Until these new pipelines get completed, the depressed prices within the Marcellus region are resulting in idle wells. In Pennsylvania, about 3,000 of the 8,000 wells drilled are idle. According to one source, 1,000 to 1,500 of the idle wells could be activated if the pipeline infrastructure existed to get the gas to the market. The implications of this surge in pipeline infrastructure investment for West Virginians are many. First, it will stimulate development of the Marcellus Shale within West Virginia in the long term. As long as natural gas prices within the region remain depressed due to the inability to move the gas out, it will have a dampening effect on new drilling. The number of “idle” wells in Pennsylvania illustrates this fact. Second, the region will lose its current price advantage on natural gas supplies. Once this pipeline infrastructure is in place, prices within the region will fall roughly in line with the national price. With gas within the region currently selling at about one-half the national price, we should be moving aggressively to reap benefits from this lower cost. Examples are promoting investment in the infrastructure to support natural gas-powered vehicles (compressed natural gas (CNG) for automobiles and liquefied natural gas (LNG) for trucks). Another example is encouraging industrial electricity customers to invest in on-site generation, with combined heat and power (CHP), or cogeneration, facilities that would generate electricity (with natural gas) and thermal energy for heating or cooling. In addition, our utilities could be giving a serious thought to investing in natural gas-fired generation to achieve some fuel diversity and reduce electricity prices.

Yet West Virginia has developed no policies that would stimulate the use of natural gas within the state to take exploit the current price advantage enjoyed in the region, which will endure for at least another 3-4 years, given the expected in-service dates of many of the pipeline projects. And, of course, over the longer term, natural gas is expected to maintain a price advantage over other energy sources and, in the case of NGVs, would result in emissions benefits as well as achieve greater energy security by displacing foreign oil. In the case of CHP, industrial customers would have a hedge against ever-increasing electricity prices, as utilities operating in West Virginia continue to “double down” on coal. Rather than exploiting low natural gas prices for the benefit of ratepayers, West Virginia utilities continue to increase their reliance on coal-fired generation. Mon Power’s acquisition of the Harrison plant, Appalachian Power’s acquisition of the Amos plant, and Wheeling Power’s proposed acquisition of the Mitchell plant are recent actions taken by West Virginia utilities to invest in 40+-year old coal plants, to the exclusion of any resource diversification that would flow some of the benefits of low natural gas prices through to utility ratepayers in the state. While there are understandable political reasons supporting these coal plant acquisitions in order to support the mining industry within West Virginia, it should also be recognized that these decisions come at a cost to utility ratepayers within West Virginia, who are burdened with electricity rates that are likely higher than they would be if utilities made resource acquisition decisions based on an objective of achieving the lowest price to ratepayers over the long term.

Third, the pipeline construction activity in and of itself will produce economic benefits for the state, to the extent the pipelines cross the state or West Virginians can gain employment with the pipeline construction firms. $10 billion in new investment over the next several years is likely to produce economic benefits throughout the Marcellus Shale basin, and West Virginians should be able to share in that increased economic activity. Fourth, this amount of pipeline construction will potentially have significant environmental impacts. The proposed route of the Atlantic Coast Pipeline, for example, will cut through mountains at nearly 4,000 feet and the habitats of three endangered species, and will cross six rivers in West Virginia, according to a letter from the Friends of Blackwater to Senator Jay Rockefeller. The Federal Energy Regulatory Commission (FERC) has an extensive stakeholder involvement process that must be followed before interstate pipeline projects will be approved. Interested citizens in West Virginia should get informed about pipeline routes and possible environmental impacts and consider getting involved in response to FERC’s required public outreach activities.