Marcellus shale drillers need more pipelines to get their bountiful supply of gas to market, but improving the delivery infrastructure could cause them growing pains.
The challenge of growing the delivery network without pressuring prices with more supply is something on the minds of industry officials who are attending a conference in Pittsburgh this week.
“All these supplies that we’re growing on the gas production side are at risk if we can’t connect them to markets,” Alan S. Armstrong, CEO of the Williams Cos., a pipeline and processing group, told the Marcellus-Utica Midstream Conference & Exhibition on Wednesday.
The industry has made progress, especially in the past 18 months, at getting pipelines to more wells. But with gas production growing so fast, the pipeline investment will have to go on into the next decade and maybe longer to keep pace, experts at the conference said.
It’s a tricky balance that can cause hesitation for gas producers, said Bradley Olsen, managing director for midstream research at Tudor Pickering Holt & Co. in Houston. They commit to putting gas in these pipelines to help fund their expensive construction.
But if they commit big to help connect another part of the country where gas sells at higher prices, they risk the influx of Appalachian gas pushing down prices there, too, sticking the company with a bad investment for more than a decade, Olsen said.
“Producers don’t sign up for projects until prices get worse,” Olsen said. “It’s hard to do unless there’s some serious pain locally.”
That pain did hit big time in the fall. The growing local supply pushed prices down at natural gas hubs in Pennsylvania to $2 to $3.50 per unit below the national benchmark price, according to data from UGI Corp.
Three months after a new pipeline took Appalachian shale gas into Manhattan, industry experts said the local gas industry is going to have to keep pushing new links all over the country to sustain its growth.
“With all the promise of the shale revolution, it’s certainly not a slam dunk that we can make the most of it,” said Armstrong, referring to the challenges of connecting shale drillers to new markets. “It’s certainly going to take a long-term commitment.”
That’s likely to cost about $3 billion a year — maybe more — in Pennsylvania, Ohio and West Virginia, according to several estimates at the conference.
The threat of lower prices can make the gas industry look hard at connecting to broader markets, Olsen said. Pipeline projects to address it will take about three years, and that means the industry is probably vulnerable to price shocks and well shut-ins until 2016, he said.
The gas industry has made progress on this persistent problem in the last two years. In June 2011, 38 percent of the state’s unconventional wells were producing, many because they lacked pipeline connections, according to data gathered by the Penn State Marcellus Center for Outreach and Research. By 2013, two-thirds of all the wells in the state were connected and producing.
There have also been several new transmission pipelines, the superhighways of natural gas. Spectra Energy’s 30-inch line into Manhattan opened Nov. 1, making big news about doubling the island’s supply, according to Bloomberg. It quickly dropped prices there 40 cents per unit below the national benchmark price.
“Appalachian producers are very actively contracting pipeline capacity during project open seasons,” said Dave Messersmith a Penn State extension educator who was not at the conference, but tracks pipeline projects. “I can’t think of a midstream project in the Marcellus in 2013 that wasn’t booked soon after it was announced.”
Armstrong, the Williams CEO, warned of price volatility if the gas industry didn’t keep building up its pipelines to meet new customers. Price crashes lead drillers to pull back, either by slowing their drilling or shutting in wells they’ve drilled — common issues in Pennsylvania in 2011 and 2012. That can limit supply and cause prices to jump again. That up-and-down cycle can make new customers, especially big industrial customers the industry has been courting, skeptical about the reliability of natural gas, Armstrong said.
Coordination between drillers and pipeline companies is key, said Randall L. Crawford, who oversees midstream and commercial operations for Downtown-based EQT Corp., which has both production and pipeline arms. While there may be lags, producers and their pipeline companies are doing a better job of collaborating to ensure pipelines are ready to go to support development, he said.
“Most production companies … are economically driven, and the fact is that when you’re investing in these wells, it’s important to be able to get those returns, generate those cash flows by getting (gas) to market,” Crawford said. “I’m not going to say there’s not going to be lags because there needs to be a coordinated effort and a commitment to the pipeline capacity to get that gas to market.”
Timothy Puko is a Trib Total Media staff writer. He can be reached at 412-320-7991 or [email protected].