Far below the Appalachians lie two of the most prolific unconventional shale plays found to date—the Utica and Marcellus. Geologically separated by a couple thousand feet, they start to compete with each other at the surface when the midstream takes over.

The stunning natural gas and natural gas liquids (NGLs) output from the two unconventional plays has altered the oil and gas industry’s landscape. How will all that production be processed? Where will it go to market?

These competitors create challenges for the midstream. To date, the Utica has been behind the Marcellus’ rapid development— and may always be. But estimates of future daily production in excess of a half-million barrels (bbl.) per day mean the Utica will remain a major shale producer for some time to come. Reserve estimates vary, but Ohio’s Division of Natural Resources puts the Utica at 15 trillion cubic feet of natural gas and 5.5 billion bbl. of crude oil—and those numbers could prove conservative.

Whatever happens with the two, the industry has had to invest billions to serve a region that historically has been an also-ran in North America’s energy scheme.

Joe Magner, senior oil and gas analyst with Macquarie Securities, tracks the Utica from an upstream perspective and points to the close relationship between producers and midstream operators that will make the play grow.

“Each side needs the other to enable the projects to be realized and growth to be seen,” he tells Midstream Business. “The midstream is getting producers to commit to volumes so that they know, with some level of certainty, the volumes of gas flowing through the gathering systems and processing facilities that are being built.”

That’s happening given the Utica’s healthy proved, probable and possible reserve numbers that appear after the reservoir engineers complete their spreadsheets and hit enter. “The [Utica’s] midstream investment opportunities are still attractive given the yield and cash flow,” Magner says

Jack Lafield, chief executive at Blue Racer Midstream LLC and Caiman Energy’s chairman and chief executive, visited with Midstream Business to update what he sees happening now in the Utica, an area he knows very well. A lot has occurred since he contributed to a Utica review in these pages more than a year ago—including the formation of Blue Racer, Caiman Energy’s joint venture (JV) in the Utica with Dominion Resources Inc.

“The Marcellus and the Utica are basically brother and sister in a sense that they’re next door to each other,” Lafield says. “They use the same pipelines to the same markets. So they’ll grow—or not grow—together. Today the Utica is one of the most economic places to drill in the U.S. Midstream capacity and the ability to move products to market, though, will be key to the pace of its growth. Putting the right infrastructure in place is a very time and capital-intensive process–and we’re just getting started.”

The Marcellus physically overlies much of the Utica, but regional drilling targeting the two plays currently tends to be separated. Most current Utica action centers on eastern Ohio, while the hotspot for the Marcellus lies across the state line in western Pennsylvania and down into West Virginia.

The Utica is similar to the Marcellus in one respect that both have identifiable zones—crude oil, NGL-rich wet gas and dry gas—moving west to east across the play. And just like other similar shale plays, the wet-gas fairway is where the action is.

Magner explains the Utica has proved less productive along the oil fairway than some other unconventional plays, say for example, the Eagle Ford, “so that’s why producers have honed-in on an even tighter band of opportunity in the wet-gas, or liquids-rich window” of the play.

Hart Energy’s North American Shale Quarterly describes the Utica as an Ordovician system lying below much of the Appalachian basin, extending as far south as Tennessee and north into Ontario and Quebec. It is a black shale source rock with rich organic content. In western Ohio, the Utica system corresponds with a submember, the Point Pleasant formation.

The learning curve

“The Point Pleasant region has turned out to probably be more prolific than others right now,” Lafield says, adding quickly that “we are still in a learning curve” as producers delineate the best places to drill along with the most effective completion techniques. “We are finding that the Utica is really made up of the Utica shale formation itself and Point Pleasant, which thickens and becomes more prolific to the south. The Utica itself is thicker in the north and diminishes to the south. Several producers, though, are focused on the northern portion of the play where the Point Pleasant disappears and you see more of the Utica shale.

“One thing we know for sure is that all shale plays have one thing in common—they’re all different,” adds Lafield. Producers know well there’s both art and science to drilling and completing shale-play wells and they’re still trying to perfect what works best in the Utica—as opposed to what is effective in the Marcellus. Lafield mentions the developing technique of “resting,” in which crews frac well perforations, then shut in the well and let it sit for as long as 90 days.

“The frac water tends to expand the rock and causes it to basically close off the pores and close off the channels for the gas to escape. So by resting it, that water slowly dissipates out into the reservoir, and it shrinks back and opens up for gas and liquids production. We’re unique and it’s not something you do in the Marcellus,” he explains. Perfecting those kinds of play-specific techniques will help the Utica grow up.

It has grown immensely in the past couple years. Greg Matlock, senior manager, global oil and gas transaction advisory services for Ernst & Young, tells Midstream Business the Utica is big enough now that it has popped up on the radar of energy investors worldwide.

“Industry leaders are bullish on its prospects,” Matlock says. “That’s good because midstream operators need to finance projects that will cost billions.

“As a general matter, the shale plays have grown with development capital flowing from all over the globe into the U.S. Companies with large positions in shale plays have been, and are continuing, to evaluate their capital spend, with an eye to maximizing return,” Matlock says.

“The focus on—and need to quickly develop—infrastructure to bring the product to market provides an incredible opportunity for midstream companies, but it also has its challenges. In order to economically produce and bring to market this fantastic resource, the full value chain of operations and infrastructure needs to be put in place, and that costs money.”

So that gas-versus-liquids question comes up again—and Matlock says the rich-gas production typical of eastern Ohio wells assures Utica drilling and development will continue apace as long as dry-gas prices remain in the doldrums.

“Commentators have posited that the Utica shale, in particular, could be significant in size relative to other producing plays, and may be more liquids rich—which will continue to attract investment dollars in today’s pricing environment. Although slightly behind its neighboring state [Pennsylvania] in terms of timing, Ohio has been attracting significant investment, as companies are positioning themselves throughout the value chain—extraction, processing and out to favorable markets. A favorable Ohio legislature has also aided in attracting investment capital,” he says.

New player

Blue Racer certainly knows the Utica as well as any midstream outfit since its parent organizations, Caiman and Dominion, formed it as a separate, $1.5 billion JV last December specifically to serve the Utica’s growing contingent of upstream customers. Lafield joined from the Caiman side, where he was chief executive.

Just to emphasize its Utica focus, the partners named the newborn firm after the common, but harmless, snake found in the woods and rocky hillsides of the region. Blue racers are fast, as any kid who has tried to bend over and pick one up, knows. So Blue Racer management hopes the speedy snake represents a reputation for quick response as Utica production grows.

Dominion contributed some of its existing midstream assets, including 500 miles of Dominion East Ohio gathering lines, its Natrium gas processing plant in Marshall County, part of West Virginia’s thumb between Ohio and Pennsylvania and a Dominion Transmission pipeline connecting Natrium to the Dominion East Ohio system.

Caiman’s contribution included $800 million in equity capital commitments and midstream management expertise. Blue Racer assumed operation of Natrium last summer, which has a cryogenic plant that can handle 200 million cubic feet (MMcf) per day coupled with a 36,000 bbl. per day fractionator. The plant had a fire in late September that shut down operations. Long-term impact had yet to be determined as Midstream Business went to press.

That’s a sizeable operation but hardly enough as the Utica grows, according to Lafield. Blue Racer plans to have Natrium II, an additional 200 MMcf per day of cryogenic capacity and 60,000 bbl. per day of fractionation on stream by early 2014, plus the additional Western Connector NGL pipeline into the region.

Meanwhile, Blue Racer is building a new 200 MMcf perday processing plant at the Berne complex in Monroe County, Ohio, along with extensive gathering systems expansions throughout Noble, Guernsey, Belmont, Harrison, and Washington Counties of Ohio.

The firm also is looking into the economics of a proposed Lewis processing plant in Harrison County, Ohio, and a Petersburg processing plant in Mahoning County, Ohio. It also will be working with a third party to complete a separate propane and ethane pipeline to connect its operations to the TEPPCO propane pipeline, the ATEX Express Pipeline now under development by Enterprise Products Partners LP and the Sunoco Mariner West project.

That’s an ambitious growth plan and Blue Racer announced an $800 million credit revolver in August, expandable to $1 billion, to help finance it—this in addition to Caiman’s $800-million equity commitment to Blue Racer. Wells Fargo Securities LLC and RBS Securities Inc. were joint bookrunners and lead arrangers. A 19-bank syndicate participated with Comerica Bank, RBC Capital Markets, SunTrust Robinson Humphrey Inc., and U.S. Bank as joint lead arrangers.

Gaining access

There will be more midstream expansion to come as the play grows up. For example, Access Midstream Partners LP, the former Chesapeake Energy midstream operation spun off earlier this year, has a big Utica footprint, thanks to its former parent’s early upstream success in the play.

Chesapeake remains the Utica’s biggest upstream player. Access has two Utica-focused midstream operations. It operates and has a 66% interest in larger, Cardinal Gas Services, which consists of a 72 MMcf per-day system with 144 miles of pipeline serving five gathering systems across 1.5 million dedicated acres. Total SA and EnerVest Ltd. are its partners. It owns 100% of the second system, Utica Gas Services, which serves extreme eastern Ohio and crosses the border into western Pennsylvania to serve 393,000 dedicated acres, currently handling 2 MMcf per day. Both systems operate under cost-of-service contracts.

The former Chesapeake unit plans to add significantly to those assets with its Utica East Ohio Processing project. It will include four processing plants, each rated at 200 MMcf per day, 135,000 bbl. per day in fractionation capacity and 870,000 bbl. of NGL storage. The new system across Columbiana, Carroll and Harrison counties, Ohio, will include a 24-inch processing spine and a 12-inch NGL line serving two delivery points. Access will operate with a 49% interest. Partners are M3 Midstream LLC and EnerVest.

To fund the expansion, Access priced a public offering of $400 million of additional 5.875% senior notes due 2021, an additional issuance to $350 million of senior notes issued in 2011. Barclays, BBVA Securities, Citigroup, RBS and Wells Fargo Securities acted as the offering’s bookrunners.

Octuple

Those are just two midstream firms’ plans for the Utica— but far more infrastructure will be needed. And remember: Next door the Marcellus continues to grow, too.

All this growth has many midstream observers concerned, says E. Russell “Rusty” Braziel, president and principal energy markets consultant for RBN Energy LLC, an energy markets advisory service. “Every time we look at our NGL volume forecasts, the numbers get bigger,” Braziel said in a recent report.

“Over the next three years, the production of NGLs from the Marcellus/Utica could octuple to more than 650,000 bbl. per day. Nothing like that has ever happened in the NGL business before. It has already started. [In July] MarkWest officially inaugurated the Appalachian ethane business. From 5,000 bbl. per day today we could see 200,000 bbl. per day by this time next year if the economics to move that much ethane made sense.

“But they won’t,” Braziel adds, “because there is nowhere for the additional ethane to go. Already up to 250,000 bbl. per day of U.S. ethane is being rejected—pushed back into natural gas in the Rockies, Midcontinent and other regions. That number will be getting a lot bigger.”

So the midstream has been scrambling to process all that NGL-rich gas, then move the resulting liquids and residue gas to market—someplace.

Sunoco Logistics Partners LP takes Mariner West’s ethane from MarkWest Energy Partners’ Houston, Pennsylvania, processing plant northward to the Sarnia, Ontario, petrochemical complex via Mariner West.

Meanwhile, the Mariner East project will move some more of big ethane cut produced by the Appalachian competitors to Marcus Hook, Pennsylvania, down the Delaware River from Philadelphia, for export to Europe and beyond.

Ethane has its challenges, but prospects look better for the heavier NGLs. “There is an escape valve for excess propane supplies: Exports—and lots of them. Fortunately, international markets have been there to soak up the barrels,” Braziel noted. He points to growing propane exports for all U.S. production as a key way to keep weak NGL prices from going lower. Some Northeast propane has moved out of Sunoco’s Philadelphia terminal already.

Look south

North, west and east—but the biggest NGL market is in the other direction: south to the Gulf Coast. Texas and Louisiana hold the largest concentration of petrochemical plants in the world, plus existing export facilities.

ATEX represents a separate midstream response to the Appalachian NGL challenge. The 1,230-mile system will move ethane to the major NGL hub at Mont Belvieu, Texas, and the Gulf Coast. It will include 369 new-build miles of 20-inch pipe running west from Washington County, Pennsylvania—crossing the heart of the prime Utica production area. It will join a repurposed Enterprise pipeline at Seymour, Indiana, that extends 861 miles south to Beaumont, Texas. A new, 55-mile line will run around the Texas coast from Beaumont to Mont Belvieu to complete the new system. Projected first service will be first-quarter 2014.

The competition wants in on that NGL market off to the south. MarkWest’s Utica EMG unit announced in the third quarter that it plans a JV with Kinder Morgan Energy Partners LP to support northern Ohio’s rich-gas processing with a gas-liquids pipeline to the Gulf Coast and a new Gulf Coast fractionator.

The JV’s first project would be a processing plant on a 220-acre site in Tuscarawas County, Ohio, along Kinder Morgan’s Tennessee Gas Pipeline. Initial processing capacity will be 200 MMcf per day, expandable to 400 MMcf per day. Kinder Morgan plans to convert a 65-mile segment of its existing 26-inch Tennessee Gas Pipeline to rich-gas gathering service.

MarkWest plans to construct additional rich-gas and NGL pipelines to connect the complex with its extensive, existing Utica infrastructure. This project would serve new customers in Carroll, Columbiana, Mahoning and Trumbull counties, around Youngstown, Ohio. The JV would own the processing complex on a 50-50 basis.

The second JV would be a 200,000 bbl. per-day NGL pipeline connecting the new Ohio complex to Gulf Coast customers through conversion of more than 900 miles of existing Kinder Morgan pipelines linked to approximately 200 miles of new pipeline. The system would enter service in fourth-quarter 2015 and could be expanded to 400,000 bbl. per day if shipper interest merits. Kinder Morgan will own at least 75% of the NGL pipeline, and MarkWest Utica EMG will have the option to invest as much as 25%.

MarkWest already is one of the biggest midstream operators in the northern part of the Utica play. The firm says it wants to develop a similar position in the southern core of the Utica as well, taking its current 185 MMcf per day of processing capacity to more than 900 MMcf per day, with 140,000 bbl. per day of fractionation capacity, by the end of next year. Among its assets are a large-scale rail terminal and truck rack in Harrison County, Ohio.

It estimates the Utica represents only 1% of its operating income today, and it plans to increase that percentage quickly.

This year, it started up its Cadiz I gas plant in Harrison County, Ohio, processing gas for Gulfport Energy Corp. and other producers. Currently, it has under way Seneca III in Noble County, Ohio, a 200 MMcf per-day plant set to start up in second-quarter 2014. It will support Antero Resources Corp. and other producers active in the southern end of the play. Seneca also will gain a 38,000 bbl. per-day de-ethanizer to go on stream in late 2014.

Bluegrass

Another new southbound system, the Bluegrass Pipeline, is a JV proposal by Williams Partners LP and Boardwalk Pipeline Partners LP. It will rely heavily on another line-repurposing project—a portion of Boardwalk’s Texas Gas Transmission system between Hardinsburg, Kentucky, and Eunice, Louisiana. New pipe from the Utica and Marcellus will link with that existing line. A new fractionator would go in at the Louisiana end of the system.

Current plans call for Bluegrass to go on stream in the second half of 2015. Initial capacity of the 20-inch and 24- inch system will be 200,000 bbl. per day, expandable to 400,000 bbl. per day.

Bluegrass—as well as all that other proposed midstream infrastructure—is a must, according to Alan Armstrong, Williams’ president and chief executive, who echoes Braziel’s point about the growing Appalachian children.

“Given current market dynamics in the Northeast, existing liquids systems and local outlets will be overwhelmed by 2016,” he said in announcing the Bluegrass project. “Total NGL volumes in the Northeast are expected to exceed 1.2 million bbl. per day by 2020. The proposed Bluegrass Pipeline joint venture would support Williams’ midstream assets in the region, offer an attractive return and enable Williams to become the premier NGL infrastructure provider by economically linking the Utica and Marcellus region to petrochemical complexes on the U.S. Gulf.”

Williams already is a key midstream player in the region and reported its Northeast operations, which include handling significant Marcellus production too, topped 2 Bcf per day in the third quarter. It projects it will handle 5 Bcf per day by 2015 and recently told investors it has $3.3 billion in capital projects on the table in the Northeast through 2015, including a $354-million investment in Blue Racer.

Closer to home, there continues to be talk of new, regional cracking capacity in an area that has none. Royal Dutch Shell plc announced last year it had signed an option on a site for a proposed, world-scale ethane cracker outside Monaca, Pennsylvania, northwest of Pittsburgh. Recent press reports had Shell seeking additional bids to supplement existing commitments from several firms already interested in serving the proposed plant. Other proposals for smaller cracking operations have been talked about elsewhere in Pennsylvania and West Virginia.

Gas in-gas out

So much for the gas liquids, what about the residue gas?

The competition gets close here. The plays lie comparatively near to some of the biggest gas markets on the continent— the population and manufacturing centers in the U.S. Northeast and Midwest, plus Canada’s big cities in Ontario and Quebec.

That’s the good news. The bad news is Appalachian gas output has backed out gas moving into the region on legacy transmission systems, in particular the Rockies Express Pipeline LLC (REX) Pipeline built less than 10 years ago to ship excess Rocky Mountain gas production east. Times have changed and the market Rockies gas is small and getting smaller.

REX announced plans earlier this year to reverse flow on the eastern portion of its system. The idea is to transport as much as 200,000 dekatherms (dth) per day of gas through REX westward from the Utica and Marcellus to markets in the Midwest, such as Indianapolis, Chicago and St. Louis. The gas will move into the existing REX system through a newly constructed 14-mile residue header being installed at the tailgate of MarkWest’s Seneca plant. The new facilities are expected to be in service late this year as cold weather kicks on thousands of furnaces.

All of that gas has rejiggered flows along other gas-transmission systems serving the region. Williams owns significant gas pipeline assets in the Northeast, chiefly its 10,000-mile Transco system extending from South Texas to New York. It, too, will be changing to accommodate Appalachian gas output.

Williams applied to the Federal Energy Regulatory Commission (FERC) in June for approval of the proposed Constitution Pipeline, a 650,000 dth per-day, 124-mile line that will connect Appalachian gas production with Transco’s existing Susquehanna hub in northeastern Pennsylvania. From there, gas will flow on to New York and other Northeast markets. It could go on stream in 2015, pending FERC approval. Williams’ partners in the project are Cabot Oil & Gas, Piedmont Natural Gas and WGL Holdings.

Risks and rewards

“For the future, I think you’re going to see some significant development growth,” Lafield says. “My guess is by the next three or four years we may easily see 3 Bcf to 5 Bcf per day coming out of Utica; which is a huge number.”

He pauses to put that number in perspective. “We talk about a Bcf a day like it was nothing. I’ve been in this business 42 years now and a Bcf per day of additional gas used to be unbelievable. So we’re going to see a huge growth in gas and NGL’s coming from this shale play,” he adds.

“Obviously the big challenge for the midstream companies is that we’ve got to design and build our facilities to meet the range of needs our producers have for facilities that serve various sections of the Utica. Some areas to the west may be producing a lot more liquids and condensate than gas. In these areas, liquids handling becomes a lot more important— versus to the east where it’s primarily natural gas with very little liquids,” Lafield says.

Ernst & Young’s Matlock agrees, telling Midstream Business, “Although the outlook appears to be positive, the Utica shale will likely have to confront issues that other plays have had to confront—capacity challenges, long-term return on investment of significant midstream capital spend needs and market outlook and challenges.

“Properly managed and risked, the Utica shale appears to offer significant benefits, but will require significant investment,” he adds. “Operating costs, including those in the Utica, have continued to be stubbornly higher than expected, and the companies that can innovate quicker to increase operating margins and gain efficiencies will succeed.

“The United States’ shale resources, and the methods in which U.S. companies develop, produce, transport and bring to market such resources, is on the global stage, providing the U.S. with a clear competitive advantage at the moment,” Matlock says. “To keep that momentum going, it will be critical for companies to continue to invest in infrastructure.”

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