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As pipes reverse flows, 'optionality' trumps profits

By T.L. Hamilton and Samantha Santa Maria

April 02, 2014 - Three pipeline projects that were set to begin moving more gas out of the Appalachian shales to traditional upstream markets as early as Tuesday herald a growing focus on market optionality over profitability.

Two were set to flow gas to the south on Tuesday: the ANR Pipeline Lebanon Lateral Project and the Tennessee Gas Pipeline Utica Back-Haul Project. A third, by Rockies Express Pipeline, is expected to begin flowing to the Midwest in June, although some market sources have said it also should begin moving gas west this month.

Inbound flows to Lebanon, Ohio, via Texas Eastern Transmission rose to 57,463 Mcf/d Monday and 48,842 Mcf/d Tuesday, compared with a year-to-date average of 21,498 Mcf/d, with the increase likely due to the start of flows on ANR's project, said Anne Swedberg, analyst with Platts unit Bentek Energy. Meanwhile, there was no apparent effect on Tennessee flows, with backhaul on that line actually lower than peak flows in March, she said.

All three projects are designed to provide outlets for the prolific shale gas production in a region that traditionally received most of its gas from the Gulf Coast and Rockies. (See map: Pipelines change direction)

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Although several projects in the years to come are aiming at capitalizing on future power-generation growth, industrial demand and liquefied natural gas exports, the ones that are going into service now have a far more immediate need: market optionality.

"For a producer, you're not driven by pipeline spreads; it's not going to influence you. You just want to get it to a market," said Greg Hopper, vice president of consulting firm ICF International. "Spread or no spread, they need certainty of market for their supply."

Total Northeast supply came in at nearly 18.1 Bcf Monday, according to Bentek, compared with regional demand of 17.3 Bcf/d.

Supply is expected to outpace demand going forward, forcing the hand of Northeast producers and pipelines to find alternative homes, particularly in traditional upstream markets. Bentek is forecasting Northeast production at an average of 19.9 Bcf/d in 2017, vs. demand of nearly 18 Bcf/d.

Tennessee's project will flow 500,000 Dt/d north to south from Mercer, Pennsylvania, to several locations along the Gulf Coast, such as the line's South Texas delivery points. The project cost $155.6 million and includes pipe modifications at eight compressors, according to a recent company presentation.

Inbound Northern flows on Tennessee's 500 line, where the reversal will occur, were at 874,575 Mcf/d Monday, compared with a total capacity of 1.2 Bcf/d, according to Bentek data.

A regional trader said originally he was confused by producers buying capacity on the project because it didn't pay to do so. "With the variable costs to ship gas down there right now you'd get no demand dollars back," he said. "It's trading flat with [Tennessee's] 500 leg, so it doesn't pay to ship there."

The trader said that when Marcellus production ramped up in 2009, he saw a lot of producers picking up backhaul capacity even though the lines weren't full. "Then later we realized it was a smart investment by them because the spread [to Henry Hub] eventually blew out."

Meanwhile, ANR's project provides reversal capacity of 350,000 Dt/d on the Lebanon Lateral, receiving gas at its connection with Dominion Transmission at Lebanon, Ohio, and providing transportation services to southern points on the ANR system.

The lateral was originally built specifically for ANR to get gas from Louisiana to the East Coast during the rust belt era of the late 1970s and early 1980s, when the nation lost a lot of heavy industrial demand in the Midwest and flows began to head east.

"That trend was how lateral pipelines started getting built," Hopper said. "This project shows how we've come full circle from that time."

Southeast outbound flows on the ANR-Southeast line were at 786,520 Mcf Monday, compared with a total capacity of 1.6 Bcf/d, according to Bentek data.

Prices on the Gulf Coast might be lower than those in the Northeast consumption markets, but there's a better chance of getting to a variety of consuming sectors and making a sale there, Hopper explained.

The growing industrial and export markets have prompted a handful of other open seasons from both companies, including two Tennessee projects to get LNG to terminals in Louisiana, and an ANR project to move 646,000 Dt/d on its Southeast Main Line.

The projects have seen a lot of interest from customers, specifically for projects headed to the Southeast. Indeed, ANR's Lebanon Lateral project had "far more firm commitments than originally expected," company executive Dean Patry said in November.

Interest in moving gas south continues to remain strong, as ANR announced Monday that its Southeast Main Line project has been fully subscribed for 2 Bcf/d of firm transportation for 23 years. About 1.25 Bcf/d will begin flowing in 2017, with the remaining volume flowing the next year, the notice said. The project includes a reversal of 600,000 Mcf/d.

Next page: Southeast gas demand expected to increase markedly

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