As the Marcellus and Devonian shale-gas plays continue to be explored, data show that the extensive resource lies under portions of six northeastern states and covers 95,000 square miles. The majority of developing and developed Marcellus shale gas is in northwestern West Virginia and in Pennsylvania, with lesser quantities developed in New York.

The West Virginia and southwestern Pennsylvania developments have generally involved hydrocarbon-rich gas, while gas developed in other parts of the play is generally dry, pipeline-quality gas.

As reported in 2011, Marcellus shale development has proceeded at full-throttle, and a variety of midstream infrastructure projects have followed closely behind. According to data provided by the Energy Information Administration, total U.S. northeastern daily gas production rose significantly by mid-year.

Northeastern Pennsylvania growth, which is primarily dry gas, was most significant, followed by the hydrocarbon-rich developments in southwestern Pennsylvania and West Virginia. Overall, regional production reached 4.5 billion cubic feet (Bcf) per day and was continuing to grow in late 2011.

The U.S. Geological Survey estimates for the Marcellus region have been reviewed and recently raised to 84 trillion cubic feet (Tcf). Operators have continued their development plans despite ongoing uncertainty remaining in the various states' regulatory arena, specifically the continuing dialog related to hydraulic fracturing and reporting requirements. Other factors include the concern regarding earthquakes in eastern Ohio thought to be the result of Marcellus area brine injections into a deep disposal well in Ohio and possibility of local-impact fees being proposed by Pennsylvania legislators. In New York, the final decisions on hydraulic fracturing regulations by state regulators might cause some operators to elect to cancel their leases and develop elsewhere for now.

Infrastructure update

The most significant growth area in the Marcellus region has been north-central and northeastern Pennsylvania. Many of the Marcellus gas-gathering systems in these areas are focused on dry-gas development and are connecting those facilities to the existing regional interstate pipeline grid. After implementation for initial Marcellus development, many of these gathering systems are being expanded or consolidated. Other gas-gathering systems will continue to be developed as regional supply-development activity remains reasonably steady. Table 1 is a list of the area's dry gas-gathering systems that have been developed or are proposed.

In contrast, extensive hydrocarbon-rich gas-processing and liquids-handling infrastructure has developed over the past several years in West Virginia and southwestern Pennsylvania. This midstream infrastructure includes implementation of wet gas-gathering systems, conversion of some existing gas facilities to exclusively wet- gas service, associated gas-processing plants, fractionation facilities, product storage tanks and truck- and rail-loading facilities. Produced natural gas liquids (NGLs), valued relative to a higher forward crude-oil price forecast, are aggregated and marketed for added value above what those same hydrocarbons would have received had they remained in the gas stream and been priced and sold therein.

Liquids uplift

Although not as rich in certain hydrocarbon content as some other developing shale plays in the U.S., the liquids revenue uplift in the Marcellus region is sufficient such that gas-processing infrastructure is being implemented in a number of key locations. Later, when available ethane quantities can be extracted and taken to market, additional revenue upside will be possible.

Gas-processing plants or fractionators have been implemented as well as connections to local NGL transportation and distribution capabilities such as truck, rail, barge and pipeline. Recently, MarkWest Energy Partners LP—the region's largest liquids operator to date—announced that by 2013 it will add 600 million cubic feet (MMcf) per day of additional processing capacity and 140,000 barrels (bbl.) per day of incremental fractionation capacity to accommodate production from the Marcellus and the neighboring Utica shale. This would bring the company's total northeast regional processing capacity to 2.3 Bcf per day and total fractionation capacity to nearly 300,000 bbl. per day. Table 2 focuses on the various Marcellus gas-processing and NGL-transportation systems currently in place, in process or offered for operators' consideration.

Ethane projects

Ironically, many of the rich-gas streams being processed in the Marcellus region are higher in ethane content relative to other U.S. shale developments and relative to other U.S. domestic gas sources.

In addition to having enhanced value as an NGL product, this higher-than-average ethane content becomes an increasing concern, over time, due to the lack of proximity to downstream consuming markets or storage facilities. To date, produced ethane has generally been blended with other regional flowing gas to continue to meet pipeline gas-quality specifications.

However, many pipeline operators have signaled that ongoing development is yielding production volumes that will exceed regional pipeline blending options and flexibility by 2013 and thereafter. At that point, regional processing or treating capabilities to remove the ethane and transport it from the area must be in place.

Some ethane pipeline solutions have been agreed upon by some key companies and will provide for future quantities of extracted ethane to be marketed into new ethane pipelines for take-away to downstream consuming markets.

The first ethane pipeline solution off-the-ground is the Mariner West project, a joint venture between MarkWest Energy Partners LP and Sunoco Logistics LP. Currently under construction, the Mariner West will utilize a combination of existing and converted Sunoco pipeline facilities and a new connecting pipeline to Mark West's Houston, Pennsylvania, gas processing complex. Facilities will route up to 65,000 bbl. per day of ethane to existing consuming markets in Sarnia, Ontario. Service is expected by fourth-quarter 2013.

Supporting the Mariner West project are ethane contracts with Nova Chemicals, representing the the primary Sarnia market. Marcellus operator Caiman Energy LP has announced a commercial arrangement for Nova to purchase up to 15,000 bbl. per day of ethane from Caiman's Fort Beeler gas-processing plant. Caiman has routed an NGL pipeline from its Fort Beeler plant to Mark West's Houston plant. Also, Marcellus producer Range Resources Corp. signed a contract for Range to provide a long-term supply of ethane to Nova.

In January 2012, Enterprise Products Partners LP announced that it received necessary contract commitments to allow it to build a new Marcellus ethane pipeline to the Gulf Coast, including a 595-mile pipeline routing southward from southwestern Pennsylvania to Cape Girardeau, Missouri, where it would connect with a reversed, existing Enterprise 16-inch pipeline. The so-called ATEX Express Pipeline would then be connected to Enterprise's existing Mont Belvieu, Texas, natural gas liquids storage and distribution complex by a 55-mile, 16-inch pipeline facility.

The 125,000 bbl. per day project would be in service by first-quarter 2014. Expansion potential above 125,000 bbl. will depend upon shipper interest. In fact, Enterprise has just recently announced that requests have exceeded the originally proposed capacity. Negotiations continue as to when or if the proposed project size might be increased and how that might affect the project timeline.

A number of other competing ethane projects have been offered to area operators. Some are routed eastward, some would route westward toward markets in the Chicago area, and several proposed routes head to the U.S. Gulf Coast. Several of these proposals remain in play for consideration by regional operators.

Petrochemical possibility

Meanwhile, Shell Chemical Co. is continuing to evaluate the potential implementation of a major petrochemical complex in the Marcellus region. Recently, the West Virginia House of Delegates announced that it had passed legislation that would offer substantial tax breaks "for any company that spends at least $2 billion to build an ethane cracker (chemical plant) in the state," it reported. This bill was signed into law in late January. Pennsylvania and Ohio have also been encouraging Shell (or others) to consider such facilities in their states. With regional ethane already proposed to be exported by pipeline to other consuming markets, a critical path item for locating any major petrochemical facility in the region thus becomes the long-term sustainability and availability of ethane remaining in the area, after exports, from the Marcellus play and, potentially, from the developing Utica shale, as well.

Other NGL products produced in the Marcellus region continue to be at quantities that, thus far, have been generally removed by existing area liquids pipelines or managed by truck, rail or barge transportation into local or regional markets.

Additional gas-processing plants, phased expansions of existing plants and fractionators are planned, as well as connection of all of these facilities to NGL transportation and distribution systems. With implementation of the ethane pipelines, critical path solutions will be in play and should minimize any expected near- to mid-term concerns for downstream pipeline gas quality issues. With favorable ethane pricing, ethane producers should also realize added overall NGL value as well.

Sold out

Today, most of the pipelines in the northeast region are sold-out, from a firm transportation capacity standpoint, both for annual gas transportation service from distant supply areas or from regional storage facilities providing firm seasonal withdrawals of gas in the winter months.

Historically, most area expansions of pipeline capacity have been driven by downstream market demand for additional flowing supply or for storage, rather than being driven by upstream supply availability. However, a number of Marcellus producers have elected to push their supplies deeper into the market area, and Utica producers are expected to do likewise when their volumes reach sufficient scale.

The interstate pipeline expansions in Table 3 represent a unique combination of firm capacity offerings. Some are short-haul expansions, or feeders, meant to improve the connectivity of developing volumes to points on the regional pipeline grid where firm capacity might already be available to downstream markets or regional gas storage.

Other expansions represent construction of incremental firm capacity to provide direct access to downstream markets in the northeast. Numerous other projects will be evaluated for future implementation, with most of them seen as needed in 2013 and beyond.

In the interim, the developing Marcellus supplies will effectively compete for access to existing firm pipeline capacity and market share, in many cases backing off gas being received from distant supply areas.

Despite the possibility for remaining hurdles to regional supply development, Marcellus midstream gas and NGL infrastructure developments have continued. Even in a lower overall natural gas price environment, most area producers have stayed the course. Producers developing only dry gas have necessarily reduced some of their activities, but several are supported by joint-venture agreements or production-carry arrangements to enable them to continue to move ahead, at least for now. Near proximity to consuming markets also provides support for Marcellus development, even when lower gas prices deter development in other areas.

In general, energy companies remain committed to ensuring that facilities are in-place to gather, treat, process and move the developed resources into the regional markets or export them from the region to markets elsewhere. The Marcellus continues to be heralded as a world-class play, and its aggressive midstream infrastructure build-out will continue to anchor its overall competitive position.

With early indications that the neighboring Utica shale also has significant liquids development potential, northeastern midstream activities are expected to expand west, as well.