First in a series.
A race has begun among loose alliances of energy companies to take ethane and other natural gas liquids from the Marcellus and Utica shale formations and deliver the high-value hydrocarbons to U.S. and foreign markets.
Three interstate pipeline projects are nearing completion to move gas liquids in raw and pure form to the mid-Atlantic and Gulf Coast regions and Ontario to be sold for heating, gasoline mixing and chemicals manufacturing in the United States or for export.
The pipelines will draw gas liquids from a rapidly expanding midstream infrastructure: gathering pipelines linked to gas producers' wells in southwestern Pennsylvania and eastern Ohio and processing and separation plants that divide heavier natural gas liquids from lighter methane pipeline gas sold to utility customers.
But the new alliances of pipelines, processors and producers are facing a glut of ethane and other NGL supplies, a Brookings Institution report noted in April. NGL prices have dropped to punishing lows, confronting the industry with a war of attrition for some years until new export and product markets are built up in the United States, Brookings analysts said.
"NGL supply will likely outweigh demand for much of the remainder of this decade, owing to the long lead times and high capital expenditure required to build petrochemical facilities," Brookings report authors Charles Ebinger and Govinda Avasarala said.
"It will definitely be a shootout," said Jeffrey Quigley, a senior analyst with Energy Ventures Analysis Inc. in the Rosslyn area of Arlington, Va. In time, cheap gas liquids should be a potent building block for U.S. manufacturers, petrochemicals producers, refiners and exporters. For now, a shakeout will test the richness of producers' Marcellus and Utica acreage, the agility of drillers, the balance sheets of midstream processors, and the competitive advantages of the markets that will receive the gas liquids, analysts say.
"Ethane isn't going to make a lot of money" in the near future, Quigley said. "Who is going to able to survive? Who gets acquired? Who does the acquiring?"
"Clearly, there will be winners and losers," said Kyle Cooper, managing director of research for IAF Advisors in Houston.
The pipeline projects that will unlock the new competition follow different commercial strategies and aim at different markets.
Beginning this summer, Sunoco Logistics' Mariner West pipeline plans to deliver 50,000 barrels a day of ethane from Marcellus and Utica plays to petrochemical plants in Sarnia, Ontario, reversing the flow of an existing, refitted Sunoco pipeline.
Sunoco's companion project, the Mariner East pipeline, has a bolder course. It will take 70,000 barrels a day of ethane and propane from MarkWest Energy Partners' Houston, Pa., fractionation facility to a reconfigured Sunoco Logistics processing plant in Marcus Hook, Pa., on the Delaware River below Philadelphia. Propane shipments are expected by the second half of 2014. The ethane will be chilled and exported on specially built ships to supply petrochemical producers in Norway and other European countries, starting in 2015.
In one of the alliances that defines the competition, Range Resources Corp., a major gas producer in the Marcellus play, will be the lead supplier to both Mariner pipelines. Sunoco Logistics has budgeted $600 million to the two projects.
By early next year, Houston-based Enterprise Products Partners expects to open up the ATEX (Appalachia to Texas) pipeline to deliver 190,000 barrels daily of ethane and possibly propane from the Northeast shale developments to the Gulf Coast.
A new segment of the ATEX link will extend from Washington County, in southwest Pennsylvania, to Seymour, Ind. There it will connect with a converted Enterprise pipeline whose direction of flow will be reversed. The final leg will be a new pipeline from Beaumont, Texas, to Mont Belvieu, Texas, near Houston.
Mariner West looks like a viable project to Jack Lafield, chairman and CEO of Caiman Energy and Blue Racer Midstream -- a key player in the Utica NGL infrastructure expansion and an anchor shipper on that line. "We were the first ones to support Mariner West," he said.
But he added, "ATEX is the big one, a major line down to the Gulf Coast where the market is. That is probably the wisest choice and eventually the long-term choice."
Quigley said, "ATEX is going to be the dominant player. There is a huge need for it. It's going to get built."
Blue Racer, a venture between Dominion Energy's pipeline unit and Caiman Energy, will draw in wet gas production to its processors and gas fractionation units at Natrium, W.Va., and Berne, Ohio, with connections to ATEX and the Texas Eastern pipeline.
Another alliance links MarkWest's midstream facilities in Ohio's Harrison and Noble counties with Gulfport Energy Corp., Antero Resources and other producers in southeastern Ohio's Utica play. By mid-2014, the MarkWest Utica EMG venture expects to be running 300 miles of gathering pipelines and five processing plants to handle nearly 1 billion cubic feet of gas per day.
ATEX won't have the field to itself, however.
Tulsa, Okla.-based Williams Cos. and Boardwalk Pipeline Partners of Houston are seeking shippers for a new project, the Bluegrass Pipeline, connecting the Marcellus and Utica gas liquids production with the petrochemicals industry on the Louisiana and Texas coasts. The project is another hybrid, with a new pipeline tied into Boardwalk's existing Texas Gas Pipeline from Hardinsburg, Ky., to Eunice, La. The companies want to be delivering 200,000 barrels a day by late 2015 with the potential to double the capacity.
Bluegrass and ATEX have a major difference that highlights the competitive riddle facing the industry.
ATEX, like the Mariner lines, will ship purified NGLs that have been split into ethane and other products at fractionation plants in the Utica and Marcellus region.
Instead of moving separate streams of propane, ethane and other hydrocarbons, Bluegrass will transport "raw," co-mingled NGL blends south to the Gulf Coast for fractionation into purified streams. Williams and Boardwalk plan to build a new large-scale fractionation plant and storage in Louisiana.
"The horse race is between ATEX and Bluegrass," said Becca Followill, senior managing director at U.S. Capital Advisors LLC in Houston. "They are two very different systems."
Timing is key -- and luck
The winners of the horse race will need to have skill, timing and luck on their side, analysts say.
Continued low prices for NGLs would make pipeline transportation costs a key issue, said Quigley. That could give an edge to producers and shippers moving Marcellus and Utica LNG shipments to Europe by tanker, Wells Fargo analysts note.
"The cost to transport ethane on Mariner East to Western European markets is roughly $0.30 per gallon, compared to about $0.45 per gallon to export from the Gulf Coast," the Wells Fargo analysts said.
ATEX will add Marcellus and Utica purified ethane and other gas liquids to the bulging NGL hub at Mont Belvieu, whose natural salt domes provide gas storage capacity that attracted the biggest NGL processing and petrochemicals producers.
"Belvieu continues to dominate the NGL universe because of its critical location at the center of NGL gathering systems, product distribution pipelines and the Gulf Coast petrochemical feedstock market," noted former Williams executive Callie Mitchell on the RBN Energy Network blog.
Will Mont Belvieu become the doorway for NGL exports or a bottleneck as six new pipelines and a dozen fractionation plants open up in the coming decade? Will oversupply push Mont Belvieu NGL prices below those in Sarnia or the East Coast?
"There always value in being the first mover" in the pipeline race, Quigley said, "but not as important as what the Belvieu market looks like."
Then there are the production calendar issues.
Will the new network of shale gas wells, gathering pipelines, processors, fractionation plants and long-distance pipelines fit seamlessly together?
"You have a number of ethane facilities, and the question is timing," said Kevin Petak, vice president of the ICF International consulting firm in Vienna, Va. "Will the ethane facilities be in lockstep with the pipelines?" Pipeline projects require approval from the Federal Energy Regulatory Commission typically on a first-come, first-served basis.
Shale gas liquids producers are counting on petrochemical companies to expand gas liquids cracking plants to provide a big jump in demand for gas liquids. But it will take time to get air quality permits and construct these billion-dollar facilities, Petak said. If that timetable stretches significantly beyond 2016, that becomes important.
Williams and Boardwalk are considering NGL export strategies, following Range Resources, Sunoco Logistics and the Mariner East players. Enterprise Products Partners and Targa Resources are also planning Gulf Coast terminals to export liquefied petroleum gas.
Will construction of pipelines and export terminals coincide or not, Petak asks? "There is another potential timing mismatch," he said.
Fortune favors the strong and the agile, Quigley said. But he added, "You're going to have to guess and guess right."