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Marcellus Pipeline Capacity

Written By Brianna Panzica

Posted October 15, 2012

In Pennsylvania, the Marcellus shale has started to become a part of the state’s regular functioning.

The shale deposit extends across parts of Pennsylvania, New York, Ohio, and West Virginia. Fracking still hasn’t been approved in New York State, so drilling is currently limited, but it’s still been expanding more quickly each year.

And though the shale has been under development for the last five years, it’s reaching new heights. In Pennsylvania alone, there are 4,022 horizontal wells and 311 vertical wells.

And the surrounding Pennsylvania community is now about to receive its cut of the action.

In February, the state Legislature passed Act 13, the Marcellus Shale law. As part of the law, drillers must pay an initial impact fee on each of their wells, to be split among the affected towns and county governments.

For the horizontal wells, the fee runs at $50,000 per well. It’s lower for vertical wells, which tend to be shallower, at $10,000.

In total, this new fee has brought in $204 million, funds that will be split among the local governments in the days and weeks to come.

$109 million will go to county and municipal governments located in drilling regions.

A third of the fee will go to counties – Bradford, Tioga, and Washington in particular. Allegheny and Philadelphia counties will also receive large portions, and towns close to drilling sites will receive cuts of the fee.

Each county will also receive money from a “legacy fund,” which will go to infrastructure repairs and construction.

The state’s Governor, Tom Corbett, was in favor of the legislation from the start, and he is happy with the way it’s turned out.

From the Pittsburgh Post-Gazette:

“When we were confronted with the challenges and opportunities of this emerging industry, our goal was to get things right,” Mr. Corbett said. “I think today’s number of $204 million is a clear sign that we did.”

But the Marcellus still has locked-in potential. Wells have been springing up in the region more quickly than transportation infrastructure can be completed. And that means a supply overload.

Roughly 1,000 Marcellus wells have been drilled and are awaiting pipeline connection – a number that would more commonly be closer to 300. Of these, 400 belong to Statoil (NYSE: STO), 200 belong to Anadarko (NYSE: APC), 50 are owned by Range Resources (NYSE: RRC), and another 50 were drilled by Penn Virginia (NYSE: PVA).

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Through 2013, $3 billion in Marcellus pipelines have been approved, and according to Reuters, this could unlock an additional 5% of the nation’s daily natural gas supply.

By the end of the year, these pipelines will bring 3 billion cubic feet per day (bcfd) to market. Through next year it will add 5 bcfd.

Some plans even involve reversing pipeline flow; Williams Cos. (NYSE: WMB) is reversing the flow for some of its Transco pipeline, which moved gas from the Gulf Coast to the Northeast.

Of course, gas prices are also still running low, a factor that could hinder profitability. Companies like Chesapeake Energy (NYSE: CHK) have already admitted low gas prices are hurting revenue.

From Reuters:

“Some people are not expecting all of this capacity to come on line. The argument is just because they have pipelines doesn’t mean they will produce it. But I tend to disagree and think it will be more like the movie, ‘If they build it, it will come.’ and we’re going to be flooded by supply,” said [Phil] Flynn of Price Futures Group.

It will take a frigid North American winter to push these prices back up after last year’s unusually warm winter and this year’s hot summer kept them low. If prices are higher, companies can benefit from bringing the capacity on line.

But another warm winter might mean natural gas production will slow.

That’s all for now,

Brianna Panzica

follow basic@brianna_panzica on Twitter

Energy & Capital’s modern energy guru, Brianna digs deep into the industry with accurate and insightful updates into the biggest energy companies and events. She stays up to date with the latest market moves and industry finds, bringing readers a unique view of current energy trends.

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