Natural gas production in June 2014 for the Marcellus Shale reached 15 billion cubic feet per day which has led to abundant supplies keeping a lid on prices. Even more stunning is the fact that production could rise to 24 bcf/day by 2020. Without a massive build out of pipeline capacity, the enormous volumes of natural gas will struggle to reach consumers. This is not lost on major pipeline companies, which are already undertaking major capacity expansions.
In early December, the Federal Energy Regulatory Commission (FERC) gave the go-ahead for the construction of the Constitution Pipeline, which will be built to connect natural gas from the Marcellus Shale to northeastern states like New York and Massachusetts. The pipeline will run from northeastern Pennsylvania near Scranton to an interconnection near Schenactady in New York. The pipeline may begin construction at the beginning of 2015 and could provide additional natural gas supplies to 3 million homes in New England as soon as the winter of 2015 or 2016.
The 124-mile Constitution will link up with two major natural gas interconnections. The Iroquois is a major pipeline that runs from Canada through upstate New York, terminating in the Bronx in New York City. The Constitution will also connect to the Algonquin Transmission Line, a pipeline owned by Spectra Energy (NYSE: SE), which runs through Connecticut and services much of Massachusetts, including Boston.
The Constitution will allow Marcellus gas to reach New York and much of the Northeast, and may actually replace natural gas supplies from Canada.
The Constitution Pipeline is owned by Williams Partners (NYSE: WPZ), Cabot Oil & Gas Corp (NYSE: COG), Piedmont Natural Gas Company (NYSE: PNY) and WGL Holdings (NYSE: WGL).
The pipeline could dramatically open up distribution for natural gas from the Marcellus. Pennsylvania has been awash in natural gas, but many producers have struggled to find access to pipeline capacity to get their product out.
In particular, Cabot Oil & Gas is poised to benefit enormously from the project. Not only is Cabot a partner in the pipeline, but it also has some noteworthy production assets in the Marcellus, accounting for 14% of Pennsylvania’s natural gas production. It has posted double digit growth in production, estimating production growth of between 28% and 34% for 2014. Cabot is also projecting that its production base will expand by 20% in 2015. Even better, the company has achieved cost declines each year, and is now an industry leader with an estimated cost structure of just $1.25 per million Btu.
But one of Cabot’s main obstacles has been pipeline access. The company says that its production growth for 2015, while still expected to be an impressive 20%, will be lower than previous years due to pipeline constraints. After the Constitution Pipeline is up and running, Cabot says it will ramp up production once again.
The completion of the Constitution will be critical in supplying the Northeast with adequate volumes of natural gas, especially during cold winter months when heating is at a premium. Last year, although there was plenty of shale gas nearby in Pennsylvania, New England faced price spikes because of the traffic jam in the natural gas pipeline network. Once the Constitution Pipeline links up these regions, price spikes will likely be shaved down as supplies can reach their intended market.
Pipeline companies are not just focusing on the northeast when looking to find off ramps for Marcellus and Utica gas. Several companies are looking to reverse the flow of major natural gas pipelines that currently run from the Gulf Coast to the Northeast.
Traditionally, these pipelines have carried Gulf Coast gas to states in the northeast, but pipeline companies have yet to catch up with the shale gas bonanza, which has seen a colossal amount of natural gas produced in Pennsylvania and Ohio. As a result, several pipeline operators are investing in major upgrades to bring Marcellus gas down south to take advantage of petrochemical industries, refining, and future LNG export opportunities.
One project in particular is Kinder Morgan’s (NYSE: KMP) 13,900-mile natural gas pipeline that runs from Texas and Louisiana up through Pennsylvania and New York and delivers gas to New England. One of the largest pipeline systems in the U.S., the Tennessee Gas Pipeline, as it is known, has for decades flowed in one direction. But due to abundant supplies in Pennsylvania that have come online over the last decade, the TGP has operated below capacity. Over the course of 2013, a web of pipelines flowing into the Northeast saw their flows drop by between 21% and 84% below 2008 levels, with TGP experiencing the sharpest decline.
Kinder Morgan is undertaking alterations to its existing pipeline system to make natural gas flow in reverse direction, to help send natural gas out of the Marcellus and Utica. The project will allow an initial flow of 150,000 barrels per day of natural gas liquids to flow from Ohio to Texas. That capacity will expand up to 400,000 bpd if Kinder Morgan decides to go further. The upgrade is expected to be completed in 2016.
Kinder Morgan is also expected to construct a greenfield pipeline through Massachusetts to better supply the state, but that has run into environmental opposition and the route could be altered.
Similarly, Spectra Energy is also making fixes to its major pipeline, the Texas Eastern. It runs more or less parallel to Kinder Morgan’s TGP, connecting Texas and Louisiana to the Northeast. When completed, Spectra will open up new capacity for natural gas to flow south.
Earlier this year, upgrades were completed to the Rockies Express Pipeline (REX) to allow natural gas to flow from east to west. The REX pipeline runs from Wyoming and Colorado across the country and terminates in Ohio. Owned by Tallgrass Energy Partners (NYSE: TEP), Sempra Energy (NYSE: SRE) and Phillips 66 (NYSE: PSX), the 1,700 mile pipeline began transporting 1.8 bcf/day of natural gas from the west to the east in 2009 when it was completed. But by summer 2014, tweaks to the pipeline were completed to allow Marcellus and Utica gas to flow west, supplying natural gas to hungry Midwest markets like Chicago, Detroit – and through other interconnections – the Gulf Coast.
According to the Energy Information Administration, a series of pipeline upgrades, including TGP and Texas Eastern, could result in additional bidirectional capacity of 8.3 bcf/day over the next several years flowing out of Pennsylvania and the Northeast instead of into it (see chart).
It is hard to overstate the change in the pipeline landscape shale gas has sparked. The directional flows of natural gas out of the Pennsylvania area, while already underway, are set to accelerate. Instead of natural gas flowing in from Eastern Canada, the Rocky Mountains, and the U.S. Gulf Coast, natural gas will begin flowing in the other direction as new pipelines and directional upgrades on existing pipelines begin operating.
When completed, it will be an economic boon not only for pipeline builders, but also for customers who will gain access to cheaper supplies of natural gas.