PITTSBURGH—Increased long-term demand for Appalachian gas requires construction of the largest pipeline in the continental U.S., one that would reach from the western edge of the Marcellus Shale to a hub in the South.

Footing the cost for the $9 billion to $12 billion project is where things get complicated, especially during a downcycle, a market specialist told midstream executives at Hart Energy’s Marcellus-Utica Midstream Conference & Exhibition held in late January.

Deferring construction of the line could cost the industry as much as $70 billion, Rick Notarianni, senior analyst of energy insight at McKinsey & Co., warned natural gas industry representatives.

“A lot of the easy stuff is done already,” Notarianni said, explaining that it is easier to finance reversing lines and building out intraregional pipes. The forecast for increased demand in the next 10 years necessitates an additional 18 billion cubic feet per day (Bcf/d) of production from the Marcellus and Utica shales.

“Demand growth is now almost exclusively cut off from supply growth,” he said. Pipeline reversals, the new Cove Point LNG facility and new pipelines will cover most of the additional production, but that still leaves a shortfall of 2.5 Bcf/d to 2.7 Bcf/d. Moving that much gas out of the region would require a 48-inch pipeline.

The alternative to building the pipeline would be to drill for gas elsewhere.

“If you can’t drill wells in the Marcellus or the Utica, you’re going to have to go somewhere else to meet demand, and that somewhere else is going to be the Haynesville; that somewhere else is going to be the Piceance, the Uinta Basin out in the Rockies,” Notarianni said. “Those wells cost more and they’re less efficient, so you’ll have to drill more, so more money needs to be pumped in. Over the next 10 years, that’s almost $70 billion of non-optimal spending because you can’t drill where you should in the Marcellus and the Utica.”

Finding somebody to pay for the new pipe won’t be easy, he said:

  • Producers have traditionally shouldered that burden but balance sheets won’t allow consideration at this time;
  • Utilities have stepped up big for Atlantic Coast and Mountain Valley projects, but Notarianni questioned whether a utility in the South would be willing to back a 900-mile pipeline;
  • LNG buyers and shippers might be interested, but are currently worried about their own margins; and
  • Industrials would prefer to pay slightly more to get gas from their nearby hubs then bear the cost of a pipeline.

Thus, McKinsey doubts the needed pipeline will be built in the short term. Notarianni pointed to the lack of available funds at the moment, a reluctance by E&Ps active in the South to pipe in cheaper gas to the region and a wariness of “free riders” who would benefit from the pipe without defraying the cost.

Long term, however, rising demand will force the industry to revisit the issue, he said.

“If we want to continue growing this basin at the pace that it should be grown, are we prepared to make the big investments over the next few years to allow it to grow in the long term?” he asked.

Joseph Markman can be reached at jmarkman@hartenergy.com.

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