Recently, with gas prices rallying from a low of $1.82/MMBTU in April 2012 to a recent price of nearly $3.50/MMBTU, there has been a lot of speculation about the amount of pricing pressure which natural gas may come under as numerous gas pipeline projects in the Marcellus are completed. Until now, many of the natural gas wells which had been drilled in the drilling boom in 2011 and 2012 have been shut in, and producers have had to wait to get the gas to market as infrastructure is built to connect the wells to the interstate gas transmission system.
According to Reuters, over 1,000 wells in the Marcellus are waiting for connection to a pipeline. This backlog is nearly 230% higher than normal. Keeping in mind that new wells continued to be drilled, if all of these shut in wells come online in the next 12-18 months, these wells alone could increase US gas production by 2.4 Bcfd, or nearly 3.5% of current US daily supply. Though it is unclear how dramatically this increase in supply will affect natural gas prices, it is not likely that natural gas demand will rise a corresponding amount in the short term. Because the US East Coast has historically gotten its gas from Texas, the US Gulf Coast, and Canada via pipeline, this increase gas supply from the Marcellus is likely to affect gas pricing, and gas producers across North America. As a result, it is likely that gas pricing will go down, and that producers may not receive a proportionate increase in their results.
2012/2013 Marcellus Pipeline Projects
In the next year and a half, it appears as if over 20 projects with over 8 Bcfd of capacity are scheduled to begin operation. In the next few months alone, ten projects with over 3 Bcfd are scheduled to come online by the end of 2012; an additional 11 projects with over 5 Bcfd are scheduled to come online in 2013.
Though this increased gas production is likely to cause gas prices to suffer, the companies which own and operate these pipeline expansions are set to benefit as they sell their services under long term, fee based contracts with minimum volume commitments, and as a result, have very little exposure to commodity prices. Large capital projects like pipelines are generally never built without the contractually committed support of their customers.
The “Obvious” Winners
- Spectra (“SE”) – With four pipeline projects and 2.3 Bcfd of capacity coming online by the end of 2013, SE would seem to be deploying the larges amount of intraregional pipeline capacity and would seem to be best positioned to benefit from the growth of gas production in the Marcellus.
- Kinder Morgan (“KMI”) – With five pipeline projects and nearly 1.9 Bcfd of proportionate pipeline capacity coming online by the end of 2013, KMI’s acquisition of El Paso and its Tennessee Gas Pipeline seem especially timely. This said, growth from the Marcellus would seem to be dwarfed by the sheer size of Kinder Morgan’s asset base.
- Dominion (“D”) – With five pipeline projects and 1.2 Bcfd of pipeline capacity coming online, D also seems to be poised to benefit from Marcellus gas into its gas transmission and distribution system. Like SE and KMI, D is a large, well diversified company, and it would seem that its Marcellus pipelines are incremental rather than transformational.
Though SE, KMI, and D are set to deploy the most new Marcellus pipeline capacity, these new pipelines are are not transformational, but rather, are designed to enhance and maintain the already substantial interstate pipelines which SE (Texas Eastern and Algonquin), KMI (Tennessee Gas Pipeline) , and D (Dominion Transmission) already have servicing markets in the US North East.
Whats Going on With Williams (“WMB”)?
With just three major projects with just 600 Mcfd of capacity coming online, it would seem as if WMB was il-positioned to benefit from growth in gas production from the Marcellus. However, this conclusion would seem to only paint a partial picture of WMB’s exposure to the Marcellus. With its acquisition of Caimen’s Marcellus assets, the Laser gathering system, and other mid-stream assets, as well as the construction of the Susquehanna supply hub, WMB has created a massive rgional system based on the foundation created by its Transcontinental Pipeline. As a result, like with SE, KMI, and D, WMB’s growth in the Marcellus is mostly likely to be to come from smaller bolt-on and edge out projects rather than larger transformational projects.
Though Inergy Midstream (“NRGY,” 555 Mcfd of capacity), National Fuel Gas (“NFG,” 470 Mcfd), and EQT Midstream (“EQM,” 1.35 Bcfd of proportionate capcity) would seem to have a relatively small amount of Marcellus focused pipeline capacity coming online by the end of 2013, these three companies are a far cry from the multibillion dollar goliaths which are KMI, WMB, SE, of D, and, these five projects represent are likely to be transformational for these companies.