Marcellus Pipeline Infrastructure

Brian Hicks

Written By Brian Hicks

Posted February 19, 2013

The Marcellus Shale has provided a rich bounty to shale developers over the past year. But that frenetic pace is expected to slow down somewhat over the coming year.

Don’t worry—it isn’t because the resources are running out. Rather, production of natural gas at the Marcellus Shale is likely to slow down since drillers and developers must await the expansion of existing pipelines and the development of new pipeline networks.

Moreover, the sheer abundance of natural gas within the U.S. has caused gas prices to fall to absurdly low levels, making the business uneconomical. Thus, developers need to wait for natural market forces to nudge the prices back up again to a point where business becomes profitable.

From the Washington Post:

“The hiring has tapered off. What we see is a holding pattern,” said Kathryn Klaber, the president of the Marcellus Shale Coalition, an industry group.

The Marcellus Shale spans Pennsylvania, West Virginia, New York, Ohio, and Maryland. Production thus far has been focused mostly within Pennsylvania and sometimes in West Virginia.

The well-regarded Bentek analyses indicate that Marcellus production in Pennsylvania was up twofold in 2012 over the previous year, rising to 2 trillion cubic feet. West Virginia alone accounted for 700 billion cubic feet over 2012.

Overall, the Marcellus produced 2.8 trillion cubic feet of natural gas, or roughly ten percent of the nation’s entire output.

National Fuel Gas Co. (NYSE: NFG) is one of the companies that has seen its profits go up more than 30 percent on the strengths of a strong developing pipeline network in the Marcellus Shale.

From the Buffalo News:

“Our efforts to grow our exploration and production and midstream [pipeline] businesses continue to gain momentum,” said David F. Smith, National Fuel’s chairman and chief executive officer, in a statement.

For the quarter ending last December, National Fuel ‘s profits were up to $67.9 million. The previous year at that time, profits were at $60.7 million. In other words, National Fuel handily beat analyst expectations of 77-cents-a-share earnings by earning 81 cents a share.

As a result, for the fiscal year ending September, National Fuel hopes to achieve earnings between $2.75 and $3, the Buffalo News reports.

From fall 2011 to date, National Fuel has successfully undertaken five expansion projects. Q1 alone saw the Northern Access and Line N projects come online. Both projects are designed to transport Marcellus-produced gas to markets.

Meanwhile, reflecting the continued spate of investment and development in pipelines associated with the Marcellus Shale, UGI Corporation (NYSE: UGI) and Tenaska Resources, LLC disclosed that they’ve developed an agreement to jointly work on Marcellus shale production.

As reported in the Wellsboro Gazette, UGI Energy Services, Inc. is to develop, run, and maintain some 20 miles of new pipelines. Tenaska will undertake the new drilling efforts. The first few construction projects are slated for later this year or early the next.

All things considered, the arrangement is easily worth around $25 million. When you take into account the gathering possibilities for the acreage in Potter County, Pennsylvania that Tenaska controls, that goes up to almost $65 million. UGI also bought a 19 percent working interest in Tenaska’s acreage for $25 million.

From the Gazette:

John L. Walsh, president and chief operating officer of UGI, said, “We have a long working relationship with Tenaska, a strong company with a proven track record of success in developing energy projects. We look forward to our expanded relationship with Tenaska in the development of natural gas resources within the Marcellus Shale, and our midstream team remains active and focused on identifying and executing additional midstream investment opportunities like this one.”

The deals between UGI and Tenaska and the National Fuel story are part of a broader shift taking place right now as far as Marcellus Shale development goes. As long as the infrastructure necessary for managing and transporting the enormous quantities of gas being produced does not hold up to the volume of that production, the Marcellus will continue to experience a bottleneck of sorts.

So far, what we’ve seen is a near-infinite rise in production volume—which has, of course, led to low enough gas prices that energy companies are concerned that price levels are too low.

In order for transportation and distribution to keep up with production, the pipeline infrastructure needs to improve. And that’s exactly what’s happening right now.


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