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Oil and gas companies still waiting for infrastructure
By jamison cocklin
youngstown
It’s been a constant refrain since at least early last year, appearing in newsprint, online and over the air waves, cropping up at oil and gas conferences and coming through the phone lines on quarterly conference calls regularly.
The Utica Shale play is without critical infrastructure. It lacks adequate processing capabilities to separate wet and dry gas and refine further the mixture of propane, ethane, butane and other natural-gas liquids left over afterward. The gathering lines that take hydrocarbons from wells throughout eastern Ohio are few and far between, leaving many wells shut in and waiting to come online.
And transportation lines, the kind that deliver gas and liquids to processing facilities and markets north, south, east and west, are, for now, a thing of the future.
The problem is not unique to Ohio’s Utica Shale play, though. The valves are opening quicker on infrastructure projects in the more developed Marcellus Shale play of Pennsylvania, but producers are still waiting to put many of their prolific Marcellus gas wells to work for them, eagerly waiting for well connections to carry their profits away.
Meanwhile, Texas, Oklahoma, North Dakota and other states at the center of the country’s shale-gas revolution are waiting for more infrastructure build-out, keeping midstream companies busy and leading to ever-increasing partnerships and agreements that find exploration and production companies tying themselves to the hip of growing midstreamers across the country.
“[Companies] keep drilling wells, many are getting shut in and some are going online, but the methane wells are mostly being shut in, and the liquids are being transported,” said Gabriele Sorbara, an energy analyst at Topeka Capital Markets. “Production in the Marcellus and Utica is certainly outstripping takeaway capacity, and it will remain that way for a few years.”
For the Marcellus in particular, some of its wells have been “prolific,” Sorbara said, with the potential to produce billions of cubic feet of natural gas.
There is no storage capacity, and the midstream systems in place simply can’t handle those numbers as they fill up, he added.
In many ways, Sorbara said that at the moment some producers have “become a victim of their own success,” as production spikes and prices are pushed down.
“The [infrastructure] ramp-up will be slow,” he said, and even though “pricing fundamentals look pretty bad,” producers will continue to drill because operational, finding and development costs in the northeast are low.
In Chesapeake Energy’s latest quarterly report, it said it had drilled a total of 377 wells in the Utica, but 208 of those wells were either waiting for pipeline connections or they were in various stages of completion. In the Marcellus, the company said it had 190 wells waiting for pipelines or completion.
To be sure, energy companies are working swiftly and plan to spend billions of dollars on pipelines and processing facilities in the coming years, with some of that infrastructure already up and running.
But senior executives, equity analysts and other stakeholders have maintained that no one could have predicted the rate at which the Marcellus has grown, and they draw a similar parallel for the Utica, which is quickly becoming the country’s leading emerging play.
In the meantime, producers and midstream companies face a suit of commercial, regulatory and logistical challenges in building the pipelines that can get oil and gas out of the plays.
They must secure easements from property owners, surmount challenging geography, navigate a complex and time-consuming regulatory scheme, deal with weather of all kinds that can delay project time lines and work out commercial arrangements on a series of both interstate and intrastate lines that will carry their product to market.
Scott Carney, who works in strategic outreach with Williams, a midstream company that has partnered with Boardwalk Pipeline Partners to construct up to 600 miles of new pipeline — mostly in Ohio — for the Bluegrass Pipeline, which will carry natural-gas liquids to the Gulf Coast, said the project “is critical in the sense that it will allow companies to drill and satisfy the profits they’re looking for” in the Appalachian Basin.
“If pipelines like this aren’t built, the ... companies will just scratch their heads and go to another part of the country,” he said.
The Bluegrass was announced in March, and Carney said the company started to secure easements, or right-of-ways, for the 1,100 mile pipeline in October. The line has met some opposition in Kentucky, where a few restive landowners and public groups are concerned about its environmental impacts, but he said that’s to be expected considering the scope of the project.
Initially, the company said the Bluegrass line would be complete by 2015, but company officials have said it could be sometime shortly after that until it accepts natural-gas liquids.
Steven A. Davis, an attorney with Crabbe, Brown & James in Lancaster, Ohio, which started the Bluegrass Pipeline Lawyers, said phone lines there “have started to light up.”
The firm is trying to negotiate better compensation and is making sure landowners are aware of the terms included in their easement agreements.
Davis said group negotiations rarely slow down pipeline projects because companies provide for the time necessary to deal with them. He said it’s just one small reason why pipeline projects take time to happen.
“When you look at the Bluegrass announcement on March 6, they’ve indicated that they’ll be operational by late 2015 or so. That’s not that long,” Davis said. “The reason many of these pipelines take so long is because of jurisdiction and the oversight of multiple federal and state agencies during the regulatory process.”
For some larger producers with the resources and capital to spend, Davis said, securing pipeline deals will be easy because their “marketing plans put them in a better position to execute sales.”
In this sense, challenges differ for large and small producers.
Susan Waller, vice president of stakeholder outreach at Spectra Energy, said the company, along with Enbridge Inc. and DTE Energy — its partners on the NEXUS gas transmission line — is working with producers about where their gas will enter the proposed 250-mile pipeline expected to originate in Northeast Ohio, wind through the Midwest and serve power generators and industrial users in Canada.
“Typically, a project will take up to four years from the time commercial agreements are executed until the project is in service,” Waller wrote in an email.
NEXUS, which is projected to cost up to $1.5 billion, is targeted for an in-service date of either 2016 or 2017. It was first announced in September 2012.
The NEXUS will move dry gas over state lines, which is regulated by the Federal Energy Regulatory Commission, a key player in new U.S. pipeline projects.
FERC is charged with determining whether proposed projects are needed and in the public interest. Ultimately, it approves such projects.
Before it can do so, though, it conducts a comprehensive environmental review, requires a pre-filing application process and an application process. It also conducts much of its work alongside other federal, state and local agencies.
For a line like the Bluegrass, which will move liquids. The U.S. Army Corps of Engineers and the U.S. Dept. of Transportation’s Pipeline and Hazardous Materials Safety Administration are the primary regulatory agencies.
But regulations aren’t the only thing creating a wall for producers and midstream companies.
In a November conference call with investors and reporters to discuss third-quarter earnings, Floyd C. Wilson, Halcon’s chairman and chief executive officer, said plans to develop infrastructure in the northern part of the Utica were being delayed because of a need to cross wide expanses of inhospitable land, such as wetlands.
When Antero Resources went public in August, it disclosed individual results on 11 Utica Shale wells in the rich-gas condensate window of the play in southern Ohio. Early results showed those wells had a peak production rate of 4,632 barrels of oil equivalent per day.
Combined, the wells could produce more than 100 million cubic feet of gas per day.
At the time it announced the early results in August, that kind of production — on all but one of the 11 wells — was delayed due to a lack of gathering pipelines.
The company also said that completion on a major midstream pipeline had been delayed by two months due to wet weather in that part of the state.
“Money will continue to be dumped into these plays, and prices will be an enormous concern,” said Sorbara, of Topeka Capital Markets. “But things will proceed despite these challenges. There’s just going to be a backlog of wells waiting to be hooked up.”