Alan Armstrong has concerns. The president and CEO of The Williams Cos. Inc. doesn’t want midstream operators and natural gas producers in the Marcellus-Utica region to get caught off guard by rising demand, left without sufficient infrastructure.

Setting the tone for Hart Energy’s eighth annual 2017 Marcellus-Utica Midstream Conference & Exhibition (MUM) in Pittsburgh, Armstrong warned in his opening keynote that “there is a lot of work ahead” for the sector.

“You’re going to hear about the demand that is building up on the back of low-price natural gas,” he said. “I think it may catch us a little bit by surprise in areas like [Marcellus-Utica].”

While optimism is indeed in order, Armstrong and other executives reminded attendees that it all still comes down to growing production and the industry’s ability to deliver it safely and efficiently.

“Several years ago, I spoke about getting large-scale NGL takeaway capacity here, and we’re still fighting that [lack of capacity],” he said, referring to his 2014 MUM presentation. “We still haven’t solved that as an industry. We’re still waiting on getting some of that big infrastructure in place.”

Rich gas-dry gas

He said the lack of NGL takeaway shifted much of the region’s drilling from rich gas to dry gas. More than 60% of the rigs in the Marcellus-Utica over the last year have been targeting dry gas, according to Armstrong.

“So we are excited about any and all infrastructure going out of the area, whether we are competing against it or not,” he said. “We are rooting for everyone’s pipeline, whether gas or NGL.”

And while it’s been an eventful year and half for the firm, with “a lot of distraction and a lot of change,” according to Armstrong, the company has maintained its “tremendous exposure and investment in the Marcellus and Utica.” Williams made headlines in 2015 and 2016 for an on-again, off-again merger proposal with Energy Transfer Equity LP.

Armstrong said the company touches about a third of Marcellus- Utica gas through joint ventures and its own assets. He also pointed out that the company has maintained its focus on its Transco system—the largest interstate natural gas pipeline.

“By 2018, we will have doubled capacity on our Transco Pipeline, and that’s saying a lot when you’re starting with the largest pipeline,” he said, returning to his point about the importance of infrastructure in the region, which will be needed sooner rather than later.

And there is cause for urgency when it comes to building takeaway capacity in the Marcellus-Utica, he said. “As gas prices come down, we are seeing more and more people become confident in being able to invest in natural gas,” he said. “We really don’t have much doubt about demand [growth]. What we are worried about is this area having the ability to respond.”

He, like many at the conference, is particularly concerned for the region simply because “Marcellus-Utica is really the only area that has the scale to meet the coming demand,” he said.

“You can’t sneak up on the demand side. You’re talking about building LNG plants. You’re talking about building big power plants. You’re talking about 20-year commitments to downstream pipelines,” added Armstrong.

Get it connected

The basic infrastructure for supplying gas for the coming years is in place, he said. The key is to get it all connected and deliverable.

Armstrong showed that about 16 billion cubic feet per day (Bcf/d) of pipeline capacity is moving ahead, appearing
well-supported from contracting and regulatory perspectives.

“This region has the demand, but the one thing that could kill that demand is high gas prices caused by lack of infrastructure,” he said. “It’s extremely critical to—not just this region, but also to the U.S.—that we are able to get this infrastructure built.”

To get this done, he said, the industry must better communicate natural gas’ importance to the nation, and emphasize the industry’s ability to meet the demand to benefit jobs, the environment and consumers, who often don’t understand what it means when infrastructure gets blocked.

“I think people are starting to understand that, and I think we’ll start to see the support turn our way a bit in that
regard,” he added. “We can be excited about [executive order] announcements, but it’s not changing the opposition we have at the local level,” he said. “We’ve got to bring a voice. We can’t be heavy-handed about it. We can’t sit back. We have to talk about the importance of infrastructure to the nation.”

The Marcellus Shale is now old enough that some of the early lease acres are expiring, so to hold acreage companies must drill. Gas gathering is vital to facilitate this effort, said Patrick Redalen, president of Stonehenge Energy Resources II.

The prize is still enormous: some 214 trillion cubic feet (Tcf) of technically recoverable reserves in the Marcellus and another 184 Tcf in the Utica. “We have Tcfs and Tcfs of gas,” he said. “We estimate $110 billion of investment will be required. In the gathering piece alone, you’re going to need over 12,000 miles of gathering systems and lateral gas lines for $29 billion, so there is ample opportunity to pursue midstream projects in the region.”

But he and other speakers decried the challenges companies face to drill or install infrastructure. Many project and permitting delays are accompanied by challenges from landowners throughout the region. Redalen said, in many cases, Stonehenge spends more time upfront on permitting than it does on actual construction of its midstream assets.

Snakes and bats

“We have one eight-mile lateral we’re trying to put in, and we’re looking at the permitting taking a year and a half, and that’s not counting that we have to deal with protecting a certain kind of rattle-snake and two species of bats,” Redalen said. “Even a one-mile stepout is taking six months to a year to get permitted.”

Despite delays and higher costs, an infrastructure backbone has started to develop in the region, with 9 Bcf/d of processing capacity and NGL being shipped out to Europe and India.

Gregg Russell, senior vice president of DTE Gas Storage and Pipelines, told MUM attendees that in the past decade, DTE has deployed $4 billion in Appalachia, and will probably deploy another $2 billion. It is a partner with Spectra Energy in the Nexus Pipeline, which is expected to be in service by November. It will move 1.5 Bcf/d from Ohio and Michigan to Canada.

DTE sees big gas demand growth in the southeast region of the U.S., but also in the Great Lakes area, a demand market just west of abundant Marcellus and Utica supply but which gets overlooked, he said. DTE alone plans to retire three
of its coal-fired power plants, meaning more natural gas is needed.

As gas demand grows throughout the eastern U.S., midstream companies are only too happy to deliver burgeoning supplies from the Marcellus and Utica plays.

REX goes west

Tallgrass Energy Partners LP is one such company. The 75% owner of Rockies Express Pipeline LLC (REX) has converted REX to a header system to move Rockies gas east and Marcellus gas west. A final expansion went into service this January. It now takes 2.6 Bcf/d away from the Marcellus to points west. Antero Resources, one of the most active producers in the Marcellus-Utica, is one of the main producers shipping gas on the line.

“It’s all good for producers and consumers,” said Doug Walker, Tallgrass vice president. “We’ve got one-and-a-half-times the capacity, so we’re having ongoing conversations with new power plant developers and with Indianapolis Power & Light. Originally REX had 800 MMcf/d of contracts but we’ve added 1 Bcf more, so we’re pretty pleased.”

Marc A. Halbritter, senior vice president, business development of Blue Racer Midstream, said he is optimistic about the future and the expected growth and need for processing plants in the Marcellus-Utica region.

Despite watching a steady decline in price for crude oil, NGL and natural gas, which has led to a significant decrease in drilling, he said activity has started to pick back up, noting “that’s the first positive indication of what the future may hold.”

Marcellus and Utica production is expected to drive growth among U.S. gas basins. It is expected to show 71% growth from January 2015 to 2021, according to Halbritter. “In fact, Marcellus [and Utica] production is expected to surpass the Bakken and Eagle Ford in the early 2020s or 2030s.

That’s the second positive indication that’s expected to come from there.”

Also expected to drive production in the region is improvement of the price basis differential on the natural gas side, Halbritter noted.

“Natural gas basis has easily been over a dollar negative in the region from time to time as compared to Henry Hub, and you can see that over time just how wide it’s been. Pipelines get added over time; the Rovers, the Nexus, the Columbia projects,” he said, referring to the projects in motion. “Those tend to drive that basis closer, and the discount of Henry Hub lower that will make it more profitable for producers to drill in our area,” he said.

Ethane demand

Another product that’s expected to increase production growth is ethane demand, Halbritter said.

Up to 930,000 barrels per day (bbl/d) are going to be needed on top of what’s already being produced today, he added. “There’s 1.9 million bbl/d today being consumed, but there’s another 930,000 that could come.”

That growth consists of 630,000 bbl/d from new ethane crackers on the Gulf Coast, and another 300,000 bbl/d of exports, he noted.

Another 245,000 bbl/d of rejected ethane in the current stream of Marcellus-Utica production remains challenged, he said. “There are going to be some challenges for ethane to make it down to the Gulf Coast to the ethane crackers down there. And that’s mainly because it’s very high-cost to get there.

By the time you add in incremental fractionation and transportation, you can be as high as 22 cents per gallon.”

Due to the high cost of access to the Gulf Coast, ethane must beat at least $3.50 per million British thermal units for natural gas. “So something is going to have to happen much more than the prices that you see for ethane, if ethane is going to come from the Northeast,” Halbritter said.

M3’s view

“Ethane is a very, very important driver in what we expect to be a strong NGL recovery in the next 12 to 24 months,” said Frank Tsuru, president and CEO of M3 Midstream. In the Utica and the southwestern Marcellus, approximately 55% to 60% of that NGL barrel is ethane, he said, further noting that nationwide producers have been rejecting 500,000 to 600,000 bbl/d of ethane for the last couple of years.

“Current deliverability is 2 MMbbl, and our demand is just under 1. 5 MMbbl; therefore, the difference is made up through the rejection of ethane. I think the demand is expected to increase in the imparity by 2018. In 2019, 2020, we see that the deliverability of ethane will dip below market demand.

“The market will adjust for the demand by increasing the price. In 2017, with ethane about 30 cents, the only profitable area for ethane recovery is the Gulf Coast, Texas or Louisiana. By the time we get into 2018, we predict ethane prices will be substantially higher allowing some of the other regions including the Marcellus-Utica to recover ethane. Finally by 2019, the market demands will be such that, we see all basins in the U.S. will be recovering ethane and balance the market,” Tsuru explained.

Tsuru also said there’s significant capacity of gathering and processing assets out there to handle any increase in production in 2017 and 2018.

“Billions of dollars have been spent for new infrastructure to meet Northeast production demand. NGL is a huge component of the value chain and we’re expecting demand for NGL to outpace our ability to supply,” Tsuru said.

According to Halbritter, there’s also limited pipeline capacity currently available, including on the Mariner West and ATEX Express ethane lines.

“There’s limited space capacity on those pipes, which in my mind creates opportunity and explains some the reasons why Shell is located here. It will provide a local market for ethane and we can look forward to seeing PTT Global and any others locate in the region as well as just to have local demand. It’s going to provide better netbacks, we believe, than going to the Gulf Coast,” he said.

The big Shell cracker that is to be built outside Pittsburgh will have a dramatic impact on Appalachian ethane demand when it goes into service in 2020 or later. But it may not be enough. Denise Brinley, special assistant to the Pennsylvania Department of Community & Economic Development Executive Office, told conference attendees that the commonwealth’s ethane production could support as many as four new crackers.

Steven M. Woodward, senior vice president, business development, for Antero Resources Corp., noted that by 2020 more transportation capacity will be needed, “which means people need to commit this year if they want to be in service. Otherwise, we will run out of transportation capacity as we continue to grow.”

New markets

Stuart Nance, marketing vice president for Reliance Holding USA Inc., opened a panel discussion with a description
of the firm’s “floating pipeline” of six tankers that move U.S. ethane to three Reliance Industries Ltd. crackers in India. The system begins with refrigeration and loading equipment at the Morgan’s Point terminal of Enterprise Products Partners LP, served in part by the ATEX line. He noted the tankers are roughly three times the size of the INEOS ethane tankers now moving ethane to Europe from Marcus Hook near Philadelphia.

He saluted Enterprise Products Partners LP “for doing a phenomenal job” in starting up the Morgan’s Point terminal. The large project was done on a short, 18-month schedule. Reliance gains “tremendous optionality and flexibility” as a result, he said. “We feel like it will be a great advantage for us, the pieces are all there” and Reliance is actively seeking additional ethane supplies, Nance added.

There are new domestic markets too, Joe Lloyd, vice president of operations for Panda Power Funds, told attendees in his presentation. Panda is building efficient, combined-cycle, gas-fired power plants, including the first in the Marcellus region. The plants are built on a 30-month scheduled once Panda receives a notice to proceed, he said.

“Pennsylvania is a great place to be and the local communities have been very supportive,” Lloyd said, adding “we’ve built on what you guys have done” in developing the region’s abundant gas reserves.

The will to build

The financial capital exists to fund the midstream’s buildout in Appalachia’s unconventional plays. The greater question, however, is whether the public will exists to permit construction.

Three financial specialists contributed their viewpoints to a lively roundtable discussion the financial markets.

The participants discussed the capital question from differing professional perspectives. Ben Davis is a partner at Energy Spectrum Capital, a Dallas-based private equity firm. Rob Wilson is director of research for East Daley Capital, a financial analysis firm based in metropolitan Denver. Guillermo Sierra is managing director and head of the midstream advisory in Houston for Macquarie Capital (USA) Inc., a capital provider, commodity trader and financial advisor.

Wilson said his clients are “heavily focused on what we call Tier-1 plays” now due to the energy industry’s contraction. He listed those top plays as the Permian Basin, the Midcontinent’s Scoop and Stack plays “and the Marcellus. We’re seeing a lot of questions directed specifically at midstream companies. We’re advising our clients on private placements of debt, equity and, more recently, preferred equity in the Marcellus,” he said.

Davis said Energy Spectrum currently has a Marcellus investment under way with Stonehenge, its second project with the firm in the region. Looking ahead, Davis added Energy Spectrum “would love to do more in the Marcellus and Utica. We’re constantly looking for strong management teams. Ultimately, we want to meet the midstream needs of the producers.” He emphasized the importance of strong, experienced management teams in finding and funding attractive and successful projects.

Sierra told conference attendees “we live in one of the most exciting times for our industry. We, as a country, are sitting on some of the largest resources in the world … and the world needs our energy. The development of infrastructure that we expect to happen over the next several years creates a massive opportunity, the opportunity is huge,” he added.

But Sierra added the energy industry faces an important question about “how do we live and operate in a more volatile environment?” Macquarie sees “an appetite” for energy investments among investors despite the recent volatility.

The three panelists expressed concern about continuing public resistance to midstream projects that would move Marcellus and Utica production to market—particularly into New York and New England. Wilson said such opposition “is hard to model” for captal providers when analyzing a project because of the whims of environmental activists. One project may quickly receive permit approval while a similar project nearby quickly becomes bogged down in endless legal maneuvers and protest rallies.