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Ohio, the Crossroads of the Shale Revolution Part 2

August 4, 2016 | By Warren Waite

In roughly four short years, natural gas production in the State of Ohio has transformed from minuscule to a force to be reckoned with. Year-to-date, Ohio’s Utica Shale production is averaging a little over 3.5 billion cubic feet per day (Bcf/d), about 0.1 Bcf/d more than  all of the Marcellus production within West Virginia, and nearly a quarter of the amount of gas production being generated out of Pennsylvania. 

In this week’s Get the Point, we consider the implications of the production surge in the Buckeye State and its impact on the state’s overall supply and demand balance. A series of pipeline infrastructure projects have been implemented in the last 12 months, but a flood of even more capacity will traverse Ohio over the next few years.

These projects will transport not only Marcellus Shale gas molecules, but an increasingly higher portion of Utica gas as well. Can production growth really skyrocket that quickly to fulfill all of these projects given the lower price hydrocarbon environment and the pullback in drilling activity?  We’ll take a high level view to see if it can.

In Part IOhio, the Crossroads of the Shale Revolution we chronicled the rapid production growth from Ohio’s Utica Shale. In annual percentage terms, Ohio production grew by roughly 100% in 2013, 200% in 2014, 100% in 2015 and thus far in 2016 is averaging 33% more than it did last year. This growth is highly concentrated; 87% of Ohio’s production in 2015 resided in five core counties on the eastern edge of the State: Belmont, Carroll, Harrison, Monroe, and Noble counties. The vast majority (89%) of the production in those five core counties comes from five producers: Antero Resources, Chesapeake Energy, Gulfport Energy, Hess Ohio Development and Rice Drilling. A major reason for this concentration of production was detailed in the stratification of the many windows within the Utica with high initial production rates and attractive rates of return coming from the dry windows along the eastern edge of the state.

Change of Fortune

It took about three years since the surge of Utica production volumes in early 2013 for Ohio to move into a net long gas position, meaning the state produces more than it can consume. This past winter (similar to the greater Northeast region) was the first winter season on record where production was greater than cumulative demand. As a result, Ohio no longer needs to consume all those Marcellus production molecules from the east to make it through a winter heating season. Utica production provides enough for the Buckeye State- at least on the surface level.  During the Winter 2015-16 season, Ohio showed net outflows of gas of about 0.8 Bcf/d, while Winter 2014-15 showed a net inflow of 1.5 Bcf/d. 

Ohio Supply and Demand

Of course, where the production is located isn’t always the same location as where the gas is needed most. Therefore, a portion of Marcellus-produced gas on Columbia Gas Transmission (TCO), Dominion Transmission (DTI) and Dominion East Ohio will still traverse into Ohio for localized consumption. The excess Utica and Marcellus production that connects to Tennessee Gas Pipeline (TGP), Texas Eastern Transmission (TETCO), Texas Gas Transmission (TGT) push gas south towards the Gulf Coast.

Rockies Express Pipeline (REX) takes supply west into Indiana. There are a handful of new-build pipelines in the works to take incremental volumes into the Midwest, which we’ll discuss later. Note that ANR Pipeline and Panhandle Eastern Pipeline Company (PEPL), though not directly tied to Marcellus or Utica production, receive interconnect supply from REX and TETCO.

Ohio Demand Growth

Demand growth in Ohio has thus far been minimal. The only demand sector that has increased has been gas-fired power generation. Ohio power burn gained 0.2 Bcf/d this past winter compared to the prior 3-year average. The increase in power burn stems from low and competitive natural gas prices compared to coal and the retirement of coal-fired plants within the last year or so. Regardless, future production growth is expected to outpace any increase in future gas-fired generation demand.

There are three new gas-fired power generation plants planned in Ohio over the next two years. In June 2017 the Oregon Clean Center Energy will add about 848 megawatts (MW) of capacity. In December 2017, Carroll County Energy LLC will install 683 MW and in June 2018, the Middletown Energy Center will add 595 MW. In short, these new gas plants could bring about 0.2 Bcf/d of new gas-fired power burn. 

This past winter, Ohio and the rest of the Appalachian States (PA, WV and KY) outpaced New Jersey and New York power demand by 0.3 Bcf/d. New Jersey and New York power demand recaptured the top spot this summer, but come winter, that could change again. For more on this relationship and trends in Northeast power burn, see Changes in Latitudes

Crossroads of the Shale Revolution

Much of the production gains witnessed over the last year wouldn’t have been possible if it were not for a series of pipeline expansions that essentially flipped traditional pipeline flow direction on its head. There were many, but the largest was the 1.2 Bcf/d REX Zone 3 East to West project, completed back in September 2015. The latest was in late May when the 758 MMcf/d Texas Gas Ohio to Louisiana Access project went into service. 

Exit Capacity Through Ohio and Production

The chart above depicts outflows from Ohio moving west (blue shaded area) on REX and south towards the Gulf Coast on TGP, TETCO and TGT (red shaded area).  The outflows represent not only the net flows from Ohio production minus demand, but also gas that moves from Pennsylvania into Ohio. Exit capacity via the aforementioned routes are fully utilized and rarely have unused day to day capacity. The red line is forward looking capacity from various projects of those same pipelines plus a few newly built pipelines such as Energy Transfer’s Rover Pipeline and Spectra and DTE’s Nexus Gas Transmission. (Project details and descriptions are available to PointLogic clients here.) Historical and forward looking Utica production is represented by the black line. The orange bars are the difference between Ohio production and Ohio outflow capacity.

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Remember, Marcellus gas from Pennsylvania fills in the historical gap of exit capacity versus Ohio production. However, looking forward, by late 2017 exit capacity has a huge level step upwards which outpaces expectations of production growth from the Utica. Moreover, it also outpaces expected production growth from Southeast Pennsylvania Wet production and other parts of the Marcellus that can move west. What does that mean?

It means that instead of new infrastructure projects coming online and quickly filling via new production growth (as has been the historical trend), a portion of pipeline capacity may remain underutilized by their anchor shippers. That doesn’t necessarily mean it will go unused, it could be acquired by marketing companies via the capacity release market or through an asset management arrangement.

Current exit capacity from Ohio is just shy of 5.0 Bcf/d. Assuming no pipeline project delays or cancellations, by the end of 2018, exit capacity will be 13.0 Bcf/d, or about 7.5 Bcf/d greater than our Ohio production forecast.

New drilling activity in the Utica and the wet portions of Pennsylvania and West Virginia remain dismal at a combined 25 active rigs, or a decline of 67 rigs from its peak in November 2014. So unless new drilling starts to occur like gangbusters, how will production grow in the short-term? Fortunately there is an inventory of drilled but uncompleted wells (DUCs) and treated wells in backlog. July estimates place Ohio and Pennsylvania at around 1,200 wells in inventory, according to IHS data. Converting these wells in inventory to production, in addition to increased drilling, will be the crux of production growth through 2017. By 2018, DUCs should in large part be exhausted. 

Fork in the Road

Assuming that production growth can’t immediately fill the flood of new exit capacity from Ohio, which projects would likely be the ones unfulfilled? We can look to the forward market and announced tariff rates to help answer that.

Before we dive into that, there are a handful of assumptions that must be stated for this analysis:  1) The forward prices used are from July 29 settlements, -they are not a price forecast. 2) The supply hub price is an approximation for what production prices might be. Each individual producer will yield a different wellhead price based on their own circumstance and portfolio.  3) The destination price is the most liquid price hub in proximity at the end of the pipe. 4) The analysis excludes stack rates from moving gas from one pipeline to another. 5) The analysis is a high level approximation of the economics to move Utica/Wet Marcellus gas west and south.

  • Option A: to the Midwest (specifically Dawn, Ontario)

Utica/Wet Marcellus to Dawn

To get to Dawn, announced rates for the greenfield pipelines Rover and Nexus were used.  On average those costs are just under $1.00/MMBtu, inclusive of reservations rates. A blend of TCO Appalachia and Dominion South Point forward prices were assumed for supply. The Dawn-TCO/DTI locational spread comes to around $0.66/MMBtu for Winter 2017/18 and $0.50/MMBtu for Summer 2018. Roughly speaking, a nickel for commodity and fuel can be assumed. That said, the Rover and Nexus corridor towards the Dawn hub makes sense on a pure variable cost perspective, but once demand charges are factored in, it struggles to break even. 

  • Option B: to the Gulf Coast

Utica/Wet Marcellus to the Gulf Coast

The overwhelming majority of southbound flows out of Ohio are on TETCO and TGP, thus the only two pipelines used in this analysis. For the sake of simplicity, TGT and Columbia Gulf projects were excluded. Dominion South Point forward pricing is the assumed proxy for supply on southbound flows via TETCO and TGP. Using firm backhaul rates and blending the calculated costs of the two pipelines yields about $0.50/MMBtu, or about half the fully loaded costs to ship via Rover and Nexus. The Henry Hub-Dominion South Point locational spread is about $0.73/MMBtu in Winter 2017/18 and Summer 2018. Variable costs between the two pipes average out to about $0.20/MMBtu.  That said, net spreads moving south are just north of $0.50/MMBtu and when you factor in demand charges, it is still 20 cents or so in the money.


The above analysis depicts a rapid transformation in Ohio’s supply and demand balance in just a few short years. Though demand growth in Ohio is expected, it will be small compared to the continued growth in production expected out of the Utica. Ohio is at the crossroads of the Marcellus and Utica shale revolutions. Existing, expanding and newly built pipelines are continuing to change the landscape of outflows from the Appalachia region.

According to PointLogic forecasts, Utica and Wet Marcellus production growth won’t be able to match the speed in capacity growth in late 2017. This is a change from the traditional way of thinking about how production and new capacity play off one another. Given the higher costs for new-build pipelines targeting the Michigan and Dawn markets, the forward market tells us that these projects are the more expensive option than sending excess Utica and Wet Marcellus supply south of Ohio towards the Gulf Coast. The time horizon of this analysis is pretty far out, but nonetheless it’s important to monitor as infrastructure projects come to fruition and changes in supply and demand impact the forward markets. 

Stay tuned as PointLogic monitors the supply, demand and transportation options in this Crossroads state. Ohio’s production landscape and importance in the natural gas market has been forever altered due to the productivity of the Utica shale and promises to be an exciting market player for years to come.


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