The Marcellus: So Much Gas, But Where To Put It?

The term "Marcellus Shale" has become very popular in the U.S. natural gas industry's lexicon in recent years -- and with good reason.

An enormous geologic formation of natural gas-bearing shale that spans much of the Appalachian region from Upstate New York to southwestern Virginia, the Marcellus might contain 50 trillion cubic feet of recoverable natural gas based on current estimates – enough to meet the needs of the entire U.S. for two years. Other estimates are several times higher. The location of the Marcellus is both a blessing and a challenge for producers. Although it enjoys proximity to the lucrative Northeast market, the natural gas field currently lacks sufficient pipeline and storage infrastructure to accommodate dramatically higher pressures and volumes. That is changing, however; Iroquois, Williams, Enbridge, Spectra, and other pipeline companies have announced expansion plans in the region.

"The amount of infrastructure in planning and development is astounding in both scale and scope," said Lee Van Atta, Vice President - Advisors with Ventyx, an Atlanta-based energy and utilities software, data, and advisory services firm. "Anywhere from $2 billion to $3 billion will be spent on pipeline expansions over the next four years. As Marcellus Shale production increases, new pipeline infrastructure is brought on-line, and new supply paths are developed, additional underground natural gas storage projects will follow, as well."

'As Marcellus Shale production increases, new pipeline infrastructure is brought on-line, and new supply paths are developed, additional underground natural gas storage projects will follow, as well.'

Van Atta described the Marcellus gathering, processing, transmission, and storage scene as "frenzied," and he pointed out that related businesses throughout the region are tying their long-term growth to the development of the massive shale gas play. "Virtually all of the major interstate pipelines in the region and many local market players such as LDCs (local distribution companies) and smaller companies are making a gambit for leveraging the expected surge in gas production to support significant infrastructure projects," he said. "There are already a half-dozen announced major Marcellus Shale pipeline projects totaling over 3.5 billion cubic feet per day of incremental capacity. These projects are competing for commercial support to begin construction over the next two to three years."

According to Van Atta, the keen interest in infrastructure projects throughout the Marcellus region is hard-earned. "The U.S. natural gas industry has struggled in the past to get recognition for its accomplishments and contributions," he said. "Given that apart from the Barnett Shale, natural gas production from shales is still relatively small -- but growing fast – and many plays are in early stages of testing, the industry has done a remarkable job of spreading the word about the outstanding potential and benefits from shale gas production. Upstream, midstream, and downstream players have been generally supportive of this effort where in the past it has been difficult for producers, pipeline companies, and consumers to align."

Gaining support for pipeline and storage projects to accommodate growing Marcellus production will be an ongoing challenge. Exploration and production companies and pipeline and storage project developers in shale plays such as the Barnett in Texas and Haynesville in Louisiana enjoy a key advantage over Marcellus operators: deep roots. Public and private stakeholders in the two Southern states have a long history of working with the oil and gas industry to implement projects in a manner that is acceptable to all parties involved. In the Marcellus heartland of the Mid-Atlantic States, however, government officials, landowners, and the general public and others tend to be less familiar with the oil and gas industry's solid environmental track record.

"Some environmental interests remain skeptical of shale gas and concerned about water quality and local impacts of drilling activity," said Van Atta."The water access and water disposal issues associated with hydraulic fracturing continue to be a focal point. The industry’s exemption under federal water regulation has been held out as a concern with the risk of loss of this exemption held out as a Material Adverse Change clause in the ExxonMobil -- XTO deal, for example." ExxonMobil is acquiring XTO Energy, which owns or leases the right to drill on 280,000 net acres in the Marcellus.

Van Atta predicts that regulatory authority related to "frac water" will remain at the state level, but more could be done to assure the high potential of shale gas is realized. "Current national energy policy is at best ambivalent in regards to use of natural gas," he explained. "Government support in the form of grants, tax credits, and other direct support are focused on renewables, energy efficiency, nuclear loan guarantees, and clean coal technology. For the most part, shale gas is still overlooked as part of the solution for providing cleaner and more secure energy for the American economy."

The onus has been and will continue to be on the industry to educate various stakeholders about how projects will benefit specific municipalities, counties, and states. A 2009 Pennsylvania State University study projects that the Marcellus could support $13.5 billion in economic output and nearly 175,000 jobs in the Keystone State alone by 2020. Failing to proactively disseminate information about the natural gas industry's practices and track record could prove costly for producers and pipeline companies alike.

Failing to proactively disseminate information about the natural gas industry's practices and track record could prove costly for producers and pipeline companies alike.

"Apart from permitting and regulation challenges at the wellhead, there is still permitting risk associated with the infrastructure to move Marcellus Shale gas to market," Van Atta said. "New Jersey and New York are challenging areas to permit and construct new pipelines, and any infrastructure that requires major water crossing or new rights of way will face a long process. Bottlenecks in pipeline takeaway capacity could become a major threat to expanding Marcellus Shale production."

A ready supply of information could help to prevent projects from reaching a standstill, but it will need to come from more than one corner of the natural gas industry. "The public relations and public affairs work needs to continue and evolve," said Van Atta, adding that the most active shale gas producers have led the Marcellus public relations/public affairs effort to date. "This is understandable but shale gas must quickly move beyond an 'emerging' issue and barriers to scale will need to be overcome," he said. "Education on the safety standards of the industry and the benefits of resource development to local residents will be critical." One organization that has made industry facts readily available to the general public is the Marcellus Shale Coalition, established in 2008 by production companies active in Pennsylvania. Another group, the Independent Oil & Gas Association of New York, has created its own Marcellus-focused web site.

As the number of Marcellus wells in production increases, the focus will increasingly shift to pipeline and storage projects. Traditionally, the Northeast has received its shipments of natural gas via pipelines from Western Canada and the Gulf Coast and through a series of liquefied natural gas (LNG) import terminals located along the Eastern Seaboard. As production from the Marcellus ramps up over the next several years, and assuming the infrastructure will expand to accommodate this new production, the region's reliance on these outside sources should diminish.

"There is some additional market share natural gas can capture from oil in the Northeast from residential heating conversions and retirement of several large, old oil-fired or dual fuel steam power plants," said Van Atta. "However, the bulk of the increase in Marcellus Shale production will need to displace other gas sources currently flowing to the Northeast."

"The high price premiums above Henry Hub that Northeast markets experience seasonally will likely decline as utilization of gas supply routes from Western Canada and the Gulf Coast drop," Van Atta continued, adding that the LNG scene may be relegated to a more secondary role. "The LNG import terminals in the Northeast may continue to see higher utilization given expansion of liquefaction capacity if European and Asian gas demand remains relatively low for the next several years. However, beyond that the growth in the Marcellus Shale could limit LNG to winter peaking duty in the Northeast."

'The high price premiums above Henry Hub that Northeast markets experience seasonally will likely decline as utilization of gas supply routes from Western Canada and the Gulf Coast drop.'

Five to 10 years hence, the pipeline industry may well have achieved a goal that it has long sought. "There is a chance that the severe capacity constraints that have been a part of the New York City market for years will finally be overcome," Van Atta said. "That has been the 'holy grail' of the U.S. pipeline industry, and the high winter prices at the major New York/New Jersey gas pricing points TETCO M3 and Transco Z6 are irresistible." However, he predicted that a more likely scenario will involve expanded pipeline capacity from the Marcellus Shale but continued difficulty with seasonal constraint points. Such constraint points would force Marcellus gas into Mid-Atlantic markets and create displacement of gas back to the Gulf Coast. "The ongoing constraint points and bottlenecks should create opportunities and value for gas storage," Van Atta added.

Pointing out that shale gas -- particularly from the Marcellus Shale -- is often referred to as a “game changer," Van Atta said that ideally it will not be a zero-sum game for the natural gas industry. "The sudden and rapidly growing access to this large and relatively inexpensive natural gas supply should drive the creation of new markets and strong market growth for natural gas and not simply displace other natural gas sources from existing markets," he concluded. "Marcellus will be a true game changer if its vast apparent wealth can be leveraged into much higher penetration of natural gas in the overall energy mix in the Northeast market. To accomplish that may require a unity of purpose beyond that which the fragmented natural gas industry can produce."