Appalachian pipes: regulatory and economic prospects in a low gas price world

HOUSTON, 15 April 2016 – In recent weeks, pipeline developers have announced delays to several major Appalachian pipeline projects, citing a slow regulatory process in the region and a weaker gas price outlook, among other factors. With 21 bcfd of capacity on more than 25 projects already in advanced stages of development and slated to come online during the next three years Wood Mackenzie evaluates the outlook for the Appalachian pipes.

According to Wood Mackenzie the key considerations are:

• Combined production from the Utica and Marcellus has grown from virtually nothing at the beginning of the decade to account for 25% of total US gas production today. By 2020, the Marcellus is expected to see production of 30 bcfd, while the Utica will more than double over that time period to 9 bcfd.

• Despite changes to the timing of production growth due to the commodity price downturn, the Utica remains an important source of future supply growth and is driving the need for more gas takeaway capacity from the basin. The completion of wells out of the drilled but uncompleted (DUC) well backlog has supported production in the near term, but Utica production in 2020 is now expected to be 1 bcfd lower than our 2015 forecast.

• After years of having insufficient pipeline capacity out of the basin, southwest Marcellus and Utica producers appear to have contracted for more pipeline capacity than they are likely to need. Neither the producer nor pipeline developer benefits by having a capacity commitment that threatens a shipper's solvency, so some of them may come together to renegotiate, delay, or phase projects. Based on the basin's economics, we expect all proposed capacity—and then some—to be needed eventually.

• Several Northeast pipeline projects have recently announced delays, including two large projects to the Midwest, Rockies Express Zone Three Capacity Enhancement and Rover. Which projects proceed, and on what schedule, will depend on several factors including the project's strategic importance to the developer, the shippers' creditworthiness—utilities are a safer bet than producers—and need for the capacity, and the regulatory process. The four large, long-distance greenfield pipelines proposed from the southwest Marcellus and Utica area are:

     o Atlantic Coast Pipeline which is fully subscribed by utilities but has recently filed a new route with the Federal Energy Regulatory Commission;
     o Mountain Valley Pipeline which is fully subscribed, including by some utilities but also by a producer that may not need the capacity until later;
     o Nexus Gas Transmission which uses an existing right-of-way for much of its route, connects Spectra's Texas Eastern and Union Gas systems, and has commitments from creditworthy utilities, but is not yet fully subscribed and features commitments from some producers expected to have excess pipeline capacity;
     o Rover Pipeline which uses an existing right-of-way for much of its route and is 95% subscribed by producers, but some of these producers are expected to have excess pipeline capacity.

In conclusion, we expect some projects to be delayed or reduced in size relative to current developer plans, but it is too early for Wood Mackenzie to call which specific projects will be impacted by delays and how. We will be watching closely as markets and regulators weigh the merits of the various pipelines over the next few months. 

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