A Tale of Two Basins - Permian and Marcellus Pipeline Buildout

According to the Energy Information Administration (EIA), by 2030, the gas produced in the regions of the country containing the Marcellus/Utica and Permian basins will be more than 50% of the total gas produced on shore in the lower 48 states. That production is only useful, however, if it can reach the demand centers in the country -- and to do that, it is necessary to build pipelines from those supply basins to the demand centers. Today we look at two key features of Permian and Marcellus/Utica gas production, the commodity being produced and the regulatory environment, and how those features have impacted and may impact the future buildout of pipeline capacity from the two regions.

In particular, we will review the Texas Railroad Commission’s (TRRC) decision earlier this week to abandon any pretense of limiting flaring from Texas crude wells. As a result of this decision, producers will need to contract for gathering and processing services only if those services are priced lower than the market price of the gas, which may increase flaring and suppress the need for additional transmission pipelines. We then look at how the regulatory hurdles in the Northeast have thwarted expectations for the buildout from the Marcellus/Utica, and anticipate how the remaining buildout might play out given the continuing regulatory uncertainty. The major roadblock for the buildout from the Marcellus/Utica region is not finding customers, as in the Permian, but in obtaining the regulatory approvals needed and sustaining those approvals in the face of court challenges.

Combined Growth

The graphic below shows the combined historic production from the two regions of the country where these shale plays are found and the EIA’s projected production growth through 2030. While there has already been over 15 Bcf of growth in that production over the last four years, the EIA expects there to be another 17 Bcf increase in production between now and 2030.

Two Key Features

In the Marcellus/Utica, producers’ goal is extracting the gas from the shale formation, but in the Permian, the target of the producers is crude oil. Natural gas is simply a byproduct of that crude production. In the Marcellus/Utica the pipelines needed to move the gas to market cross state lines, which means they are regulated by FERC. But in the Pemian, it is possible to reach the key markets on the Gulf Coast without ever leaving Texas, which means the major transmission lines are instead “lightly” regulated by the TRRC.

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Permian

The following graphic shows the projected in-service dates for the current crop of gas pipelines being built to bring Permian gas supply to market. We have generally accepted the anticipated in-service dates for all of the projects, except for the last two projects, which we believe will be delayed a few years -- and perhaps may never be built -- because we see little to no activity that would suggest the projects are going forward.

The regulatory environment and status of Permian gas as a byproduct is important to understanding why this week’s 2-1 vote by the TRRC approving a decision to allow flaring by EXCO Operating Company may suppress the need for additional pipeline capacity from the region. In the decision, the TRRC separated the economics of the gas stream from the economics of the crude stream. Thus, the TRRC now allows flaring even when a well is connected to a gathering system if the gathering fees offered by the gathering company exceed the expected revenue from selling the gas.

Given the current low prices of gas, even at the Henry Hub, this decision could lead to substantially more gas being flared unless a new gathering line can be built for a rate that guarantees a profit to the producer after factoring in the transmission cost as well. If there is more flaring and less gathered gas, this may lead to a suppressed demand for transmission lines. For those projects that have not reached a final investment decision, shippers may demand a rate that guarantees a positive netback, or opt to flare the gas instead, which may make finding shippers willing to pay enough to support infrastructure with long term contracts even more difficult.

Marcellus/Utica

The following chart compares the anticipated in-service dates proposed by the project sponsors for projects that were intended to bring Marcellus/Utica production to markets to the actual and currently projected in-service dates for those projects.

As can be seen in the graphic, the expected in-service dates for these takeaway projects were highly optimistic. Our projected in-service dates for those projects not yet in-service essentially fall into three groups.

Those under construction that have not experienced any stays of their work have been projected to be in-service using our model’s median In-service date for similar projects.
Mountain Valley Pipeline and Atlantic Coast Pipeline, the capacity for which we include at the end of 2020 and 2021, respectively, but see our recent note, MVP and ACP – Similar Projects, Similar Problems, Different Paths.
Those that have been approved by FERC but are not yet under construction. These are generally projects being held up by state regulatory approvals and for those we are projecting them as being in-service in 2022. In actuality, the question for most of them is not when they will go into service, but if.

As revealed by those last two categories, the major roadblock for the buildout from the Marcellus/Utica region is not finding customers to support the projects, as in the Permian, but in obtaining the regulatory approvals needed and sustaining those approvals in the face of court challenges, especially before the Fourth Circuit.

There is one other challenge that has not yet resulted in a problem for these projects, but has the potential to delay progress going forward -- FERC’s new methodology for assessing greenhouse gases. Since we wrote about this topic in The First Casualty of FERC’s Fight Over GHG , the DC Circuit issued an opinion concerning Dominion’s New Market project, which essentially determined that the law does not require FERC to undertake the analysis being promoted by Commissioner Glick, and finds that the methodology supported by Commissioner LaFleur is “adequate” and also questions the adequacy of the Republican members’ method. This issue remains something that bears watching for all FERC projects across the country and could ultimately delay any project that was approved after May 2018.

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