Over the past two years, natural gas production from the Appalachian region has soared with growth in the Marcellus pushing total production beyond 10.5 Bcf/d. Just next door the Utica Shale is coming into focus with attractive economics due to the natural gas liquids, crude oil and condensate production. The looming question is natural gas takeaway capacity. With Marcellus production continuing to grow and Utica supplies coming on, production in the Northeast will soon exceed regional consumption and will need to be moved out of the region to other markets in the U.S. and Canada. To accomplish this, new pipelines have been proposed and reversals of existing infrastructure that was originally built to transport gas into the region are being implemented. Today we review another of the proposed projects.
In yesterday's blog post "Something to Brag About - Record Interest in NYMEX Gas" we erroneously stated that Gazprom closed its Houston gas trading operation. Gazprom told us yesterday that this was false and that Gazprom Marketing & Trading USA is remaining in the US gas marketing and trading business, both physical and financial. We apologize for the error.
This is Part 5 of our series titled Return to Sender which focuses on the flow reversal taking place at the border between the Eastern U.S. and Eastern Canada. In Part I (see Return to Sender – No Such Demand) we observed that supplies of Marcellus gas have started to flow back across the border into Canada at Niagara, NY – previously a major import supply point to the Northeast. We noted that demand for natural gas on the Ontario side of the Canadian border is expanding while traditional supply volumes into the region from Western Canada are declining. In Part 2 we covered infrastructure additions and expansions that are being made to facilitate increased flows of gas from the Marcellus into Ontario via Niagara both West to the Union gas trading hub at Dawn and East to the TCPL mainline and the Enbridge Greater Toronto Area (GTA) distribution system (see Return to Sender - Flowing Marcellus Gas into Eastern Canada). In Part 3 we reviewed gas supplies currently flowing into Western Ontario at the Dawn Hub from the Midwest, the Gulf Coast, and Western Canada. Nexus, a new pipeline project due online in 2015 would deliver 1 Bcf/d of Utica gas into Dawn replacing some if not all of the traditional supplies. In Part 4 we investigated the proposed Constitution Pipeline that would deliver gas from the Eastern Marcellus and replace traditional Canadian supplies into New York and New England on the Iroquois Gas Transmission system (see Return to Sender – The Constitution Amendment to Iroquois Gas Supplies). In this episode, Part 5 of the series, we examine the reversal of gas flow on TransCanada’s ANR Lebanon Lateral in Ohio to enable deliveries of Utica and Marcellus gas to markets served by ANR including Michigan, Chicago, Wisconsin, or back to the Gulf Coast and Canada (via Great Lakes Transmission).
As shown in Figure #1 below, TransCanada’s ANR Pipeline has two primary legs. The Southeast line moves gas from south Louisiana (including offshore) to Michigan where it has a strong market presence. The Mid-Continent line moves gas to the Chicago area and into Wisconsin. A line around the south end of Lake Michigan connects the two legs. TransCanada also owns Great Lakes Transmission that for many years has served effectively as a “loop” (additional parallel capacity) of TransCanada’s mainline through the U.S. importing gas at Emerson, Manitoba and exporting at St. Clair, Michigan. The ANR system connects with Great Lakes at Farwell, MI from which gas can be transported and exported to Canada at St. Clair and into Ontario at Dawn. As production of natural gas in the U.S. has increased, imports from Canada have declined, resulting in lower capacity utilization of ANR’s Canadian gas receipt points.
Figure #1 – Click Image to Enlarge (Source: TransCanada)
In addition to moving gas into Michigan, ANR’s Southeast Leg also has a way to get gas into pipelines that can receive gas in the Ohio market. The connection is near Lebanon, OH and consequently is called the Lebanon Lateral. It was built about 20 years ago as a 50/50 joint venture between ANR and Texas Eastern (Spectra). The purpose of the lateral was to bring additional supplies into the northeast market by delivering gas into both Texas Eastern and Dominion’s systems for further transport to eastern markets. The configuration with the connections to Texas Eastern and Dominion are shown below in Figure #2:
Figure #2 – Click Image to Enlarge (Source: TransCanada)
Today, those supplies coming from ANR are no longer needed as Appalachian production is displacing those long haul supplies in the Northeast markets. In fact, the Marcellus and Utica are coming on so strong that gas needs to move out of the region. Capacity to move incremental supplies eastward is significantly constrained, so the only alternative is to move surplus supplies west and north out of Appalachia. Thus the obvious strategy for ANR is to reverse the flow on the Lebanon Lateral to transport gas west from Lebanon, back to ANR’s mainline (southeast leg). This would also require reversal of flows on the Texas Eastern and Dominion systems which would become the “Feeders of Lebanon” as illustrated below (Had to get that in somewhere!). Both of these pipelines have also held open seasons to gauge interest in reversing flow for Marcellus/Utica producers. As you can see in Figure #3 below, both of those systems are well positioned in the Marcellus and Utica Shale production areas.
Figure #3 – Click Image to Enlarge (Source: TransCanada)
Such a reversal would provide shippers with access to delivery points throughout TransCanada’s system into Ontario, Michigan, the Gulf Coast and points in between. Additionally the Midwest markets in Chicago at Joliet IL and Wisconsin become accessible. Ontario and Michigan are considered high value markets relative to the Gulf Coast and Chicago markets.
The use of existing infrastructure in this project is both efficient and cost effective. Reversing the flow on most pipes is a relatively simple process involving the re-piping of compressor stations and modifications to meters. This is very inexpensive relative to greenfield (new pipeline) construction, which requires a much more contentious and time consuming permitting process. Additionally, the material and installation costs for new pipe are significant. The ability to move quickly on a reversal project with relatively low risk is a big advantage.
Due to the low capital costs and risks involved, this project will not require the longer-term commitments from shippers needed by greenfield projects. Another reality of pipeline infrastructure development is that projects involving greenfield construction require a large critical mass of volume commitments to make the economics work enabling the developer to move forward. This increases the risks to potential shippers. Use of existing infrastructure makes the project much more scalable meaning that the design can accommodate smaller volumes and still proceed. And the project can be designed with the flexibility to expand further in the future. TransCanada has stated that they could be ready for a first phase of this project for up to 350,000 Dth/d in as little as 6-8 months once commitments are in place. A second phase to bring the capacity up to 620,000 Dth/d could commence service in 2 years from the date of commitment.
ANR conducted an open season to solicit interest in this project and had a significant response. As with many of the projects being developed, the producer community is still assessing their volumes, processing options and marketing plans. Regarding rates, ANR also stated that they will use existing tariff rates for this project. The tariff structure is a zone matrix that uses the geographic zones for the receipt and delivery point to determine the rate. For example, going from Lebanon to Michigan uses a receipt in Zone 3 to a delivery in Zone 7. This results in a 100% load factor rate  of 21.63 cents plus fuel/loss of 1.11%. Similarly, a delivery to the Gulf Coast in the Southeast Area results in a 100% load factor rate of 29.62 cents with no fuel/loss since it is currently a backhaul. If a shipper chooses to ship on Great Lakes to reach Ontario, the tariff rate is 23.41 cents, which is very competitive versus other alternatives.
Texas Eastern and Dominion Transmission (this blog’s namesake Feeders of Lebanon) have also held open seasons for transporting gas from Utica to Lebanon and other points, and while responses have been generally positive not much else has been made public.
There are several points to take away here. First there is a need to move Utica Shale gas away towards the west and either north or south. Second, as we have described above, there is existing infrastructure in place to do so in a cost effective manner to reach attractive markets. Third, the pipeline companies are busy developing alternatives to meet producers’ needs to reach different markets. The fourth, and perhaps the most important, is that producers still seem to be weighing their options and figuring out what they want to do. But the clock on the wall is ticking. In the not too distant future it will be important that new takeaway capacity out of the region be developed. Otherwise the market could experience an unfortunate traffic jam that would impact not only natural gas production, but also the more lucrative NGL and crude oil production volumes from the Utica.
 100% load factor rate – This is the full cost per unit of gas transportation capacity on a natural gas pipeline. Typically it is calculated by dividing the firm monthly reservation rate by 30.4 days to yield a daily rate (30.4 days represents the average days for each month of the year, 365 days/year divided by 12 months). This daily reservation rate is then added to the commodity (usage-based) rate. The total represents the 100% load factor rate.
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