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Left at the Altar:

Infrastructure Setbacks Isolate New England

April 28, 2016 | By Luke Larsen

Over the past two weeks, two pipeline expansion projects aiming to deliver gas from the Marcellus to New England have been derailed. Kinder Morgan’s Northeast Energy Direct pipeline project was scuttled due to a lack of market interest, while plans for the Williams- and Cabot-led Constitution Pipeline were rejected by New York State authorities on environmental grounds. 

In this week’s edition of Get The Point, we take a closer look at the origins and purpose of these two projects, the reasons surrounding the announcements and the expectations and considerations of the direct market participants. 

Early last week, the Board of Directors for Kinder Morgan announced that it had voted to suspend further work and associated capital expenditures on its proposed pipeline project known as Northeast Energy Direct, or “NED”. (FERC Docket CP16-21)

The company also disclosed that the primary reason for the cancellation was the lack of capacity commitments for the $3.3billion, 1.3 billion cubic feet per day (Bcf/d) venture that was slated to go into service in November 2018. As conceived, the project would have carried supply from northeast Pennsylvania to New England on two segments of newly laid pipe operated by Tennessee Gas Pipeline (TGP). Ultimately, the pure arbitrage objective was to bring highly constrained Marcellus supply currently stranded within the existing TGP constrained infrastructure (Zone 4 Marcellus is one of the lowest-priced points in the U.S.) and deliver it to the premium and more volatile markets in the New England demand corridor. 

 Figure 1: Northeast Energy Direct Pipeline proposal

Northeast Energy Direct Pipeline Proposal

While this might have been a surprise to those who reside on the periphery of the natural gas or electric power market, many within the industry have anticipated this eventual decoupling of projected capacity from the market. Similar to the run-up in proposed LNG export projects from the U.S., scores of pipeline projects have been touted. In many cases, those projects are competing for the same investment dollars.

Despite this seemingly hostile environment, it should be noted that Kinder Morgan’s conservative approach towards pipeline operations yielded first-quarter earnings from the pipeline division up almost 4% compared with the previous year. This included absorbing a somewhat large $170 million dollar loss that was primarily attributable to the writedown of assets related to the canceled NED project. 

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The potential market demand in New England (as indicated through anchor capacity agreements on several competing projects) revealed that KM’s commitment levels were not quite up to par compared to neighboring infrastructure projects. The company made the decision that its ability to grab additional market share might likely be limited. Spectra Energy, in particular, has a handful of projects tied to existing infrastructure, such as the Access Northeast Project, Algonquin Incremental Market Project and the Atlantic Bridge Project. 

NED had two parts. The “Supply Path” consisted of 161 miles of gathering line originating in the dry production rich Susquehanna County, Pa. On the Supply Path, TGP had commitments totaling about 0.75 Bcf/d (58% of capacity).

The “Market Path” of the project presented the main problem. At 179 mils, it would have been owned by Northeast Expansion, LLC, which was a joint venture between Kinder Morgan, Liberty Utilities and UIL Holdings (parent company of Berkshire Gas and three natural gas utilities located in Connecticut). However, TGP only had executed precedent agreements from a few New England local distribution companies and others that totaled just below 0.6 billion cubic feet per day (Bcf/d) of firm transportation service, or less than 50% of the 1.2 Bcf/d of gas the pipeline intended to deliver on that segment. 

With the Market Path effectively dead in water, the agreements associated with the anchor shippers in the Supply Path didn't make a lot of sense.

As we look at Northeast production levels in the chart below, it is difficult to say what the eventual impact from the project cancellation will be to northeast Pennsylvania. However, looking at the growth factors as applied across the various sub-regions of the Northeast, it is easy to point out that production has indeed plateaued. 

In a previous Get The Point release this year, well before the announcement of the NED cancellation, PointLogic Vice President Charles Nevle noted that several producers, including larger operators, such as Cabot Oil & Gas, continue to wait for pipeline projects before proceeding with additional completions, thus impacting overall production forecasts down the road. (See Other Side of the Peak.)

Cabot said its 2015 production averaged 1.5 Bcf/d, despite the fact that it curtailed roughly 75 Bcf of net production during the year. And while Cabot’s backlog of drilled and uncompleted wells (DUCs) was at 63 at year end 2015, it only expected to see a reduction to 48 DUCs by year end 2016, while awaiting the timely completion of Constitution Pipeline (which we will address shortly). 

The prospect for near-term production growth in this area seems rather bleak. Producers have slashed immediate capital investments with hopes that some supply balancing reshapes the region. PointLogic Energy rig data within this six-county area of the Marcellus NE PA region shows only 4 rigs and 1 fractionation crew operating at year end 2015.

 Northeast Production  

Always a Bridesmaid, Never a Bride: Constitution Pipeline

At an Earth Day platform on April 22, the New York State Department of Environmental Conservation denied a Clean Water Act (Section 401) Water Quality Certification permit for Constitution pipeline. The denial stated that the route did not comply with the state’s water quality standards. This permit denial came a little over a month after pipeline project partners Williams and Cabot announced that they would push back the expected in-service date for the pipeline from late 2016 to the third quarter of 2017. 

Unlike NED, Constitution was 100% contracted. The 124-mile pipeline was to have been designed with a capacity to transport 650,000 MMBtu/d and extend from the same regional supply constrained area of Susquehanna County, Pa., to the Iroquois Gas Transmission and TGP systems in Schoharie County, N.Y. This would bring cheap supply within 50 miles of the Massachusetts border near Pittsfield, and provide more options for growing New England power generation demand centers. 

Constitution Pipeline Company (a subsidiary of Williams Partners) has seen its fair share of rough seas, as it has been nearly three years since the initial application was made to FERC under Document No. CP13-499. Williams Partners holds a 41% controlling interest in the project, with other founding members being Cabot Pipeline Holdings LLC (25%), Piedmont Constitution Pipeline Company, LLC (24%), and Capital Energy Ventures Corporation (10%). Constitution had received final approval from FERC in December 2014 and on the first go-around had even projected an in-service date of late 2015.

Figure: Constitution Pipeline proposed

Constitution Pipeline Proposed

The original open season for service on Constitution was held February and March 2012, and it indicated strong demand for the service. The final results produced executed binding precedent agreements: Cabot Oil & Gas held 500,000 MMBtus/d of firm transportation service, and Southwestern Energy Services Company gained the remaining 150,000 MMBtu/d. As noted earlier, the pipeline was fully contracted. 

Construction of the pipeline had been repeatedly delayed as the initiative awaited various regulatory approvals, including the previously mentioned dissenting New York authority. The pipeline had even become a prolific battleground on the environmentalist front, with a recent stay issued in February stemming from a FERC filing from private landowners requesting a tree cutting stay in New Milford Township, Pa. FERC granted Constitution a partial notice to proceed with limited non-mechanical tree removal in Pennsylvania based upon a finding that Constitution had indeed obtained all necessary federal clearances for that particular construction preparing activity. New York tree cutting had not been permitted. 

Despite the rejection by the N.Y. Department of Environmental Conservation, Williams Pipeline, as well as the other members of the impacted pipeline group, re-affirmed their resolve for the project and will challenge the rejection. (See Constitution Issues Lengthy Rebuttal.)

Additionally, Cabot Oil & Gas has not placed all of its production eggs in one capacity basket, as it has a vested interest in Transco’s Atlantic Sunrise project, which will transport 850,000 MMBtu/d on the producer’s behalf (50% of Sunrise’s capacity); Sunrise is planned to move Pennsylvania gas into Mid-Atlantic market centers with an in-service date of July 2017. Sunrise has reported that the project is moving on schedule. However, it should be noted that the FERC deadline for issuing an environmental assessment of Sunrise is Oct. 21, 2016, and final approval is not due until Jan. 19, 2017. That’s less than six months from the intended in-service.

Impact

The Northeast as a whole has seen structural natural gas-generated power demand growth of more than 15% over the last five years, according to PointLogic regional demand data. As nuclear, coal and oil unit retirements continue over the next several years, the expectation is that New England, which is already short adequate peak capacity, will continue to be net short supply at a rapidly expanding rate unless additional supply sources are found soon. While the recent mild winter helped erase the memories of $100/MMBtu gas just two years ago during the Polar Vortex, the region’s prices remain volatile. Earlier this month, despite the reality of underlying regional supply prices trading well into the $1.00-plus/MMBtu range, Algonquin City Gate averages still were able to surge above $7.00/MMBtu, according to OPIS natural gas price data, when the pipeline tackled a couple of significant post winter maintenance projects. 

Furthermore, despite the recent overabundance of domestic supply, the New England corridor continues to rely upon LNG imports and fuel stored onsite by utilities in Winter Reliability Programs. The LNG supply sourcing practice keeps consumers subject to the geopolitical risk and economics of foreign-produced fossil fuels. And as ridiculous as it may seem, that same U.S.-produced gas that is just a few hundred miles away from this volatile market is being shipped more than 1,000 miles further from its next-door market to be frozen to liquid form and readied for export from LNG export facilities on the Gulf Coast. Run the breakeven netback on that arbitrage event.

Mixed Signals: Lower 48 LNG Flows

The unfortunate timing of these two recent pipeline setbacks has conveniently generated significant momentum for the NIMBY (Not in My Backyard) movement, despite the fact that public opinion for the most part had little to do with the cancellation of Northeast Energy Direct. 

Stay tuned as PointLogic Energy continues to dissect the pipeline project/capacity marketplace, as large market-influencing projects such as Access Northeast (projected in-service of November 2018) and Mountain Valley Pipeline (December 2018) still face long roads of development issues. In the near term, we will look at the unique impact on the supply/demand balance of each region that each project presents as flows commence on the Ohio-Valley Connector (October 2016) as well as the reverse-flow projects on Trunkline and Panhandle in which a combined total of 1.5 Bcf/d of capacity will be turned around to service the Mid-Continent. Alas, these will leave New England at the altar alone, once again.

 

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