Reversing the Rockies Express pipeline’s direction of flow would provide a huge outlet for natural gas producers in southwestern Pennsylvania, Ohio and West Virginia who are starting to see production constraints due to lack of take-away capacity. But REX’s plan to help move Utica and western Marcellus gas into the Midwest has some hurdles to clear. And even if the reversal proceeds as planned, will it be enough to address the looming ramp-up in production? Ironically, Rockies producers eight years ago faced a regional production surplus (and resulting price impact) similar to what their brethren in Utica/Marcellus are struggling with today.
In Part 1 of our three-part series, Get Back to Where You Once Belonged – The REX Reversal and Implications for Marcellus/Utica, we looked at how, just a few years ago, the Rockies were seen as a gas-market game-changer, much as the Utica and Marcellus plays are viewed today. Onshore and offshore production along the Gulf of Mexico was in steep decline. Imports of Canadian gas were also falling, and the need for additional gas for power generation in the Northeast was on the rise. The Rockies had the gas, and production ramped up quickly, but there was not enough pipeline capacity to move all of the production out of the region. Rockies gas prices took it on the chin, falling to just pennies per MMbtu. The solution to the market’s problem was REX - a 1,669-mile, 1.8 Bcf/d west-to-east conduit that was completed in November 2009. The additional capacity relieved the constraints, and the relationship between Rockies prices and those in the rest of North America returned to relative normality.
Fast-forward to now. The situation is not as dire in Utica/Marcellus as it was in the Rockies a few years ago, but it’s not pretty either. In northeastern Pennsylvania, hundreds of wells have been drilled but not completed due to lack of pipeline take-away capacity. In southwestern Pennsylvania, Ohio and West Virginia, production has been constrained by lack of NGL processing capacity and NGL take-away. Natural gas capacity constraints in that part of the Utica/Marcellus region are also starting to develop. The result has been sometimes yawning basis differentials this summer (price versus Henry Hub) at some of the big regional trading hubs like Tennessee Gas Pipeline Zone 4 Marcellus (TGP Z4 Marcellus) and Dominion South. TGP Z4 has been more than $2.00 below Henry. Dominion South, which moves gas in the area near the eastern terminus of REX, has averaged about $0.35/MMbtu below Henry.
So, how would the REX flow-reversal help? What challenges does the plan face? What else is being planned to help move all that gas waiting to be produced in Utica, the western Marcellus and the eastern Marcellus? And will all that new pipeline capacity out of Utica/Marcellus happen in time to avoid a Rockies-like pricing meltdown?
Lay of the Land
Before we answer those questions, though, we should reflect for a moment on how quickly gas production has grown in Utica/Marcellus, and how unprepared the regional and interregional pipeline network was for that astronomical growth. The centers of most production activity have been what we might call the Marcellus “Dry” region in northeastern Pennsylvania and the Utica/Marcellus “Wet” in southwestern Pennsylvania, Ohio and West Virginia (see Figure #1). Drilling in the Marcellus “Dry” region (orange oval) has been profitable due to the large initial production (“IP”) rates at many well sites in the region (see Estimating Well Production). About 80 wells per month are being drilled in the area (source: Bentek) with IP rates ranging from around 4 MMcf/d up to some wells reported at 25 MMcf/d or more. That’s huge.