New M-U Pipes Ease Constraints, Another 4.5 Bcf/d Coming Early ’18
According to experts speaking at the Platts Houston Energy Forum held yesterday, new pipelines going into service in the Marcellus/Utica region are having an effect. Pipeline constraints–not enough capacity to get the gas to markets outside of the region–are easing. Prices in some areas of our region where gas is bought and sold are improving (going up), but prices still have a long way to go. Perhaps the biggest eyeopener is that at least in the near-term, we may end up having more pipeline capacity than gas to fill it. By next spring, another 4.57 billion cubic feet per day (Bcf/d) of new pipeline capacity will go online: Access South and Adair Southwest projects on Texas Eastern Transmission will add another 520 million cubic feet per day (MMcf/d); Leach XPress on Columbia Gas Pipeline will add 1.5 Bcf/d; Rover Pipeline will get finished, bringing online an additional 2.55 Bcf/d (on top of the existing 700 MMcf/d flowing now). Here’s what the experts had to say about what’s coming down the pike in our region over the next year or so…
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The greater the risk, the greater the reward. You’ve heard that bromide multiple times in your life. And for good reason–it’s true. Our entire stock and financial markets are based on that truism. Gas traders, those who trade futures contracts for natural gas, are like any other traders–they big price swings. It is when the price of the underlying commodity swings that (i.e. when risk rises) that traders make the most money. Don’t know if you’ve noticed, but the price of natural gas hasn’t really swung much at all over the past few years–at least at the Henry Hub, which is where most contracts are pegged. Why? We have a “glut” of natural gas. As soon as the price creeps up a bit, more gas floods the market. But as we’ve written many times in the past, there isn’t just “one price” when it comes to natural gas. There are hundreds of prices–gas is traded at hundreds of different trading points along major pipelines across North America. While the price of gas is steady and doesn’t change much (i.e. no real opportunity to profit from risk) at Henry Hub, such is not the case at all trading hubs. Particularly in the Marcellus/Utica. In our region, prices have been much lower than the Henry Hub–and much more volatile. Wider swings up and down. Now that Rover is flowing, prices are going up in some areas of our region. Other pipelines have a similar effect. So gas traders are beginning to leave contracts pegged to Henry Hub behind and trying their hand at contracts pegged at other trading hubs–some in our region, some in other regions. Bloomberg gives us the low down on a trend that has the power to affect the price of natural gas across the country–particularly in our region…
Every now and again it’s helpful to step back and look at the big picture, in particular with respect to major pipeline projects. These projects have a deep and profound effect on drilling. In fact, the addition of just three pipelines in our region (currently under construction) will fundamentally change the price of gas in the Marcellus/Utica region–and ultimately lead to more drilling. How so? As part of an article on the Seeking Alpha investor’s website, author and investor Callum Turcan wrote about “Why Appalachia Matters” in which he details that three pipeline projects already getting built will provide an extra 6.45 billion cubic feet per day (Bcf/d) of capacity to flow our natural gas out of this region to other regions. Some of that capacity is already happening, with a partial startup of Rover Pipeline. When Rover is completed in early 2018, it will flow 3.25 Bcf/d of natural gas out of our region. Massive! In addition, Atlantic Sunrise is now under construction and when it is completed by the middle of 2018, it will flow 1.7 Bcf/d of gas out of the area. Finally, Leach XPress is due to be done by the end of THIS YEAR, and when it is, it will flow an extra 1.5 Bcf/d of gas out of the area. What will be the response? It’s pretty easy to predict that (a) prices for our gas will go up, and when prices go up, (b) drillers will complete wells already drilled but not yet completed (DUCs), and then (c) begin to drill more new wells. Those three pipelines aren’t the only ones that will get built…
Phase 1A of the Rover Pipeline has been online for less than a week (see 
Four Texas Eastern Transmission (Tetco) pipeline projects are expected to be completed by the end of this year and when they are, they will together flow an extra 1 billion cubic feet per day of Marcellus/Utica gas to more profitable markets in the South, as far away as the Gulf Coast. The four Tetco projects are: Gulf Markets Expansion Phase 2, Access South, Adair Southwest and Lebanon Extension. As fate would have it, Tetco experienced a fire while drilling under a highway for what we believe is the Adair Southwest project (see today’s companion story, Tetco Pipe Drilling in Athens, OH Hits Gas Pocket, Catches Fire). Three of the four projects–Access South, Adair Southwest and Lebanon Extension–are part of the same umbrella filing with the Federal Energy Regulatory Commission (FERC). Those three together will flow an extra 662 million cubic feet (MMcf) per day of gas to Ohio, Kentucky and Mississippi. Some of that gas will then catch a ride on the Gulf Markets Expansion Phase 2, flowing gas to Louisiana and Texas. Here’s the exciting part: Some of that gas will go to LNG export facilities, and some will go by pipeline from Texas to Mexico. Cool! Marcellus/Utica gas finding its way to other countries via the Tetco pipeline. Which means some Marcellus/Utica drillers will get higher prices for their gas. Here’s an update on Tetco’s four pipeline projects combining to boost prices in our region, and carry our gas to other parts of the world, and which drillers will benefit…
Yes, lack of pipelines in the Marcellus/Utica does hurt many people and businesses. When drillers can’t get their product to markets that fetch higher prices, the existing markets where they sell becomes saturated and the price drops. That means less money in royalty payments for landowners, less money in the pockets of drilling companies, less drilling until prices go up again, fewer jobs, less tax revenue flowing to the state and municipalities. Etc. You get the idea. It also can impact those who trade natural gas futures. Ginormous investment bank Goldman Sachs markets and trades natural gas–one of the world’s biggest natgas traders. The company “bet wrong” on which way the price of gas would go in the Marcellus/Utica, believing it would go higher with projects like Rover Pipeline coming online. Instead, Rover and other projects in our region hit obstacles and delays. And the price of gas stayed low. It cost Goldman $100 million this spring–turning in the worst performance ever for its commodities trading unit. Yes, we understand, it’s hard to shed a tear for a big company like Goldman. After all, they were rolling the dice in the Wall Street casino. Our point remains: When pipelines don’t get built, there’s a very real cost associated–a cost that ripples throughout the economy from the biggest players (Goldman) to the smallest players (landowners)…
Pipelines make a HUGE difference in the price drillers can get for their gas. When more pipelines get built to haul gas out of an over-saturated/producing area, like the Marcellus/Utica, the higher the price drillers can get for their gas. It’s simple Economics 101. Right now we have too much supply and not enough demand. When pipelines start flowing our gas to other markets, it the over-supply goes to places where there’s not enough supply and prices go up. This is not just theory. It’s fact. Our favorite government agency, the U.S. Energy Information Administration, has done an analysis of the price fetched for Marcellus/Utica gas for the first seven months of 2017 versus the same period in 2016. Extra/new pipeline capacity has come online in the first half of 2017. The EIA found that in the first seven months of 2016, our gas averaged a sale price of $0.76 below the benchmark Henry Hub price. In the first seven months of 2017, our gas averaged a sale price of $0.53 below the Henry Hub. The gap is narrowing year over year. That 53 cent price is a 30% improvement over last year. So yes, pipelines make a HUGE difference in the price of natural gas!…
Late last week Cabot Oil & Gas, one of our favorite big Marcellus drillers, released their second quarter 2017 update. And man oh man, was it full of interesting items! Daily natural gas production was up 14% over the same period last year. During 2Q17, Cabot averaged 1.77 billion cubic feet (Bcf) per day of net Marcellus production (2.1 Bcf/d gross operated production). Also during 2Q17, Cabot drilled 13.7 net Marcellus wells, completed 8.0 net wells and placed 6.0 net wells on production. Financially, the company continues to be a cash-making machine, generating positive free cash flow for the fifth consecutive quarter. During the first half of this year, it cost Cabot an average of $2.01 per thousand cubic feet (Mcf) to extract and sell the gas. That’s all expenses. And Cabot made an average of $2.51/Mcf selling that gas. That’s a profit of $0.50/Mcf (or 20% profit). If we could invest $1 and get back $1.20 for every dollar invested, we’d be happy to do that all day long! Cabot is currently operating two drilling rigs and one completion crew in the Marcellus. One of the most interesting (and underreported) parts of the Cabot conference call last Friday is CEO Dan Dinges’ comments on the long-delayed Constitution Pipeline. He said, “we feel more optimistic about this project coming online in the next few years than we did say a year ago.” It seems Cabot (and Williams, the builder of the Constitution) are closely watching what happens with the Millennium Pipeline and Millennium’s request to FERC to override the New York Dept. of Environmental Conservation (DEC), which is blocking the Millennium(and the Constitution). Although the Constitution awaits a court decision from the U.S. Second Circuit Court, they are planning other strategies. Dinges also addressed the PennEast Pipeline project, now stalled in New Jersey. Below is last week’s update, excerpts from the conference call, and the Cabot slide deck full of good information…
A quick oil & gas lesson, for new MDN readers. A DUC is a Drilled but UnCompleted well. Many times drillers will drill the initial hole in the ground, but then not “complete” (or frack) the well. Why do that? For a variety of reasons. The biggest reason is usually because the commodity price of gas (or oil, depending on the well) is not favorable. Rather than lose the lease a company paid good money for, they will begin the process by drilling, and then leaving, the well–only to return later to complete it when prices go up again. Keeping an eye on DUC inventories tells you a lot about the economics of a commodity–what drillers believe will happen in the near-term with the price for that commodity. Once upon a time both the oil and natural gas industries tracked together. When there was more drilling (and production) for oil, there was also more drilling and production for gas. The prices for both oil and gas tracked along the same path. What is now obvious–has been obvious for some time–is that “tracking together” is no longer the case. Each commodity, oil and gas, now have their own economics, driven by different factors. What makes it evident that oil and gas economics have now separated are DUCs. Right now oil drillers are drilling but not completing wells like crazy, piling up a high DUC inventory, saving wells for later, when prices improve. However, DUCs for natural gas are going down, especially in the Marcellus/Utica region, which means drillers believe prices will soon go higher for natgas. The fewer DUCs there are, the more new drilling there will be…
The Wall Street Journal has an interesting article appearing in today’s edition that points out the Permian Basin shale play (in West Texas) may, in a few years, “rival new gas output” from the mighty Marcellus Shale. Really? Where did that come from?! It makes a great deal of sense. The Permian is an oil-focused play. Drillers can’t stand enough rigs in the Permian fast enough. Drilling for oil in the Permian at $50/barrel is profitable–for everyone. So where does natural gas come in? Ever read about “associated gas” here on MDN? We’ve talked about it a fair deal over the years. Whenever you drill for one hydrocarbon–like oil–you get other hydrocarbons coming out of the borehole too. Like natural gas, and gas liquids (propane, ethane, butane, etc.). The converse is also true. Drillers targeting natural gas sometimes get oil and NGLs. In the Permian, an “oil play,” there is a LOT of associated gas coming out of the holes drilled, along with the oil. And the massive drilling program under way there means overall output from the Permian may, at some point, rival (or come close to) the output in the Marcellus. What does that mean for Marcellus drillers and landowners?…
We’ve written a number of times about DUCs–otherwise known as drilled-but-uncompleted wells. When a shale driller drills a new well, it doesn’t always happen all in one go. You first drill the hole down, and then curve the drillbit and drill the horizontal portion–called the lateral. Then you pull the drill bit out of the ground and (at some point) the fracking process begins. Fracking doesn’t always happen right away. Sometimes wells are initially drilled but not fracked–essentially putting them in inventory to be fracked later. Those wells are DUCs. Since a lot of the cost to develop the well has already been spent in preparing the site and drilling the hole, to come along at a later time and frack is much “cheaper” if you (as a driller) want to bump up your production. Price of gas low right now? Drill the initial hole, mothball the project, and come back later when the price of gas goes up and finish it off and hook it up to production. The DUC inventory is a closely watched number. Analysts at Platts have been watching and have noticed something interesting. In most shale plays–particularly oil plays like the Permian in Texas–drillers are sinking initial holes as fast as they can and the DUC inventory numbers are going up up up. The Permian has seen 476 new DUCs added since January! But in the Marcellus, only 3 new DUCs have been added since last December. Which is “puzzling.” What does it mean?…
As MDN began reporting last week, Energy Transfer’s Rover Pipeline, a $4 billion, 711-mile Marcellus/Utica natural gas pipeline that will run from PA, WV and eastern OH through OH into Michigan and eventually into Canada, has quickly become a soap opera. MDN brought you the news that Energy Transfer’s Rover Pipeline project has been fined by the Ohio Environmental Protection Agency (OEPA) for $431,000 for “18 incidents involving mud spills from drilling, stormwater pollution and open burning at Rover pipeline construction sites have been reported between late March and Monday” (see 
Regina Mayor is leader of energy and natural resources for the consulting firm KPMG. She’s located in Houston. However, she recently made a trip to California to speak at the Stanford University Precourt Institute for Energy. Her topic? “How Energy CEOs are Adapting in the Downturn.” We have a video of her full talk below. It’s compelling. Mayor recounts how oil and gas companies had to figure out how to make money in a low price environment. She also observes that all sectors of the energy industry are pumped on Trump: “Everyone in the industry seems to think that they’re going to be a winner under this administration. The wind and solar guys and gals, the coal folks, the gas, the upstream, the downstream, everyone believes that they’re going to win…where I come from, you always know that that can’t be the case. Logic tells you that can’t be the case. But I do find the level of optimism quite fascinating.” Below is a summary of her talk, and the video…
A Bloomberg article caught our eye. It says natural gas being exported by Cheniere Energy (in southern Louisiana) is being sold to counties like Mexico, Japan and Jordan for over $7 per thousand cubic feet (Mcf). Why is that significant and how is it related to the Marcellus/Utica? It’s significant because gas right now is selling in the U.S. for an average of around $3/Mcf. In some places, like the Marcellus/Utica region, it sells for much less. Yesterday gas sold at the Tennessee Gas Pipeline Zone 4 Marcellus trading hub sold for $2.61/Mcf. If producers can sell their gas overseas at double the price–happy days are here again! How does that relate to the Marcellus/Utica? Some of the gas being sold by Cheniere comes from the Marcellus/Utica. And later this year, Dominion will have finished and will power up their massive LNG export facility in Cove Point, Maryland. When that happens, 100% of the gas exported will go to two countries: Japan and India. And it will likely be sold for prices like Cheniere is seeing–around $7/Mcf. That is really good news for the producers who have signed contracts with Cove Point…