New England and New York may have played important roles in the American Revolution, but until this past winter these regions were largely bystanders in the nation’s newest revolution—the shale revolution.

Although a portion of the Marcellus Shale is located in New York, a moratorium on hydraulic fracturing has sidelined the Empire State. New England does not count shale plays among its many attributes.

This is, of course, quite different than another state that served as the birthplace for this nation—Pennsylvania. The Keystone State, cradle of the modern oil industry when the Drake well came online in Titusville in 1859, grew to supply half the world’s oil until 1901. Since that time, Pennsylvania has been a bit player in the country’s oil and gas industries, until the Marcellus Shale was identified as one of the two largest gas fields in the world. It’s possible that the Utica is even bigger, which puts the region on a par with international energy heavyweights such as Saudi Arabia, Venezuela and Russia.

Indeed, Pennsylvania, along with Ohio and West Virginia play an important part in this new revolution that may also have a major impact on the global stage.

Looking for a dime, found a quarter

At the start of this century, these three states were experiencing rapid population and economic declines as industries and workers left the region. Leaders in each state had spent much of the past 30 years attempting to generate new business that had relocated overseas. The shale revolution is providing much more as these states were “looking for a dime and found a quarter,” to quote the latest Foo Fighters’ song, “Something from Nothing.”

The increase in gas, oil and liquids production in the region is bringing jobs related not just to energy and construction, but to manufacturing and ancillary industries such as housing and services. The economic benefits are continuing to grow along with production.

In October 2014, the Marcellus Shale produced 16 billion cubic feet per day (Bcf/d), or 21% of total U.S. gas production, according to a Bloomberg study. This production level was 13 times greater than when the play first began production in 2007. According to the study, production is expected to increase to 22 Bcf/d by 2040, which will help the Marcellus power 65% of the Mid-Atlantic’s new power generation from 2014 to 2024.

“There are a lot of nuclear and coal power plant retirements occurring, which is further increasing demand for natural gas for power generation,” Kurt Krieger, member at Steptoe & Johnson PLLC, told Midstream Business.

Long term, the two most attractive areas for growth are the New York and New England utility markets. Both have huge premiums and rely a great deal on heating oil, which is both costly and releases more carbon emissions than natural gas.

Multiple challenges

While midstream infrastructure is in place in the Northeast, the pipeline flow has to be reversed and, in some cases, increased as the region is now no longer just a demand center but a supply center. In many other cases, new pipelines are needed to meet demand.

This is especially true in New England where only two pipelines running into the region have access to Marcellus gas: Spectra Energy Corp.’s Algonquin Pipeline and Kinder Morgan Inc.’s Tennessee Pipeline. There is additional capacity for both Canadian gas and LNG imports, but neither market is as economically competitive with gas from Appalachia, making both options unattractive for generators during capacity constraints.

New pipeline construction into the region has been delayed due to local opposition as well as a more difficult contracting system for firm supplies compared to other regions of the country.

“There’s been a lot of local opposition to the expansion of pipelines and compressor stations in Rhode Island, Connecticut and Massachusetts as more proposals come forward,” Steve Dodge, associate director of the New England Petroleum Council, told Midstream Business.

“Here in New England, we’re less than a six-hour drive from some of the cheapest natural gas in the world and we can’t get it here,” he said. “That really is a social injustice if nothing else because there are people really hurting from the very high prices of natural gas and electricity in the region.”

In 2013, natural gas represented 46% of electric generation in New England and is expected to increase to 55% by 2022. The winter of 2013 to 2014 gave a real indication to how much increased transportation capacity is needed in these markets.

As temperatures dropped, spot prices spiked around the country from around $3 to $4 per million Btu (MMBtu) to double digits. In New York and New England markets, however, prices soared to almost $100 per MMBtu primarily due to the limited access routes. There are multiple challenges in place that must be worked out to limit the likelihood of such price spikes.

“This winter really brought the issues of new pipeline infrastructure to serve new power generation loads to the forefront,” Kreiger said. “Companies discovered that they will need to buy firm pipeline transportation to have a guaranteed firm supply to their power plants. We saw that New England gas generators did not do this and the FERC [Federal Energy Regulatory Commission] is trying to figure out how to deal with this in order to maintain the reliability of the electric grid.”

In addition, Morningstar Commodities Research recently released a report stating that these huge spikes were a result of New York City generators bidding up prices to direct volumes to the city. New York has added new pipeline capacity, which should alleviate the problem in the state, but New England remains constrained.

The region has traditionally used coal and heating oil, which both have larger greenhouse gas emissions and, in the case of heating oil, are more expensive. Gas is generally economically on par with coal since the shale gale, but the lack of capacity into New England has driven gas spot prices substantially higher.

Converting New England to gas will not be easy; buying and dispensing heating oil and coal is much different than buying gas.

The biggest change for utilities is the need to make long-term purchasing agreements to support the construction of new pipelines. New England utilities aren’t allowed to recover long-term firm transportation charges in their rates. This means that the traditional contracts used by midstream operators are difficult to implement as there is no guarantee that costs can be recovered without a 10- to 20-year firm commitment from local distribution companies. Until this changes, it will be difficult for large pipeline projects to be built in the area.


The lack of underground storage and pipeline capacity ensures that LNG has an important role to play in New England’s natural gas market, which means that tankers such as the BW GDF Suez Boston will continue to make trips to Boston Harbor. Source: GDF Suez Energy NA

The good news is that New England officials are aware of the issue and are actively working to correct it through ISO New England, a regional transmission organization. Governors of the six New England states agreed to help build new gas pipeline and transmission infrastructure by dividing costs among the states based on usage. Costs would be recouped through tariffs on customers as a percentage of total energy consumed based off a multiplier.

The plan would allow states to share the costs of pipeline projects based on their percentage of energy consumed. Dodge stated that because any pipeline would have to go through multiple states, it is necessary for a plan to be undertaken on a regional basis.

Preparing for winter 2015

Another cold winter is underway in the Northeast, but New England power generators may not experience quite the pain level of last year with limited gas supplies. Lower oil prices are allowing companies to fill their reserve tanks for the coming winter at an economic rate.

In addition, LNG is expected to be more readily available via pipeline from the Distrigas terminal in Everett, Maine, due to Gaz Metro-GDF Suez’s agreement to deliver up to 1 Bcf/d of LNG from Canada to New England LNG storage units. Even after new pipelines are put in place, LNG will continue to play an important role in the region due to the huge increase in natural gas usage.

“We believe fuel competition will increase the elasticity of gas demand this winter and pipeline expansions south of New England will help alleviate fear-buying from New York generators,” Morningstar said.

Along with the lower prices, ISO New England’s Winter Reliability Program will help ensure that the region will be able to clear prices lower than current forward prices this winter through the Algonquin Pipeline.

Morningstar said that this program is also likely to be used more this year because power generators will be reimbursed for any unused oil or LNG in their tanks. This includes any supplies unused after the refilling of their tanks. Already, a total of 77 power units have announced their intent to participate in the program, which will have an auction to participate. The program’s goal is to secure 3.5 million barrels of oil and up to 6 Bcf of LNG for the season.

“Although the Winter Reliability Program will compensate oil inventory at $18 per million Btu (MMBtu), current spot oil prices at NY [New York] Harbor are trading around $12.5 per MMBtu as of late October because of the recent crash in oil prices. If spot oil prices are trading at a significant discount to the $18 per MMBtu inventory compensation level, come winter we think this will add even more downside pressure to Algonquin gas prices, as fuel switching will occur at lower gas prices,” the report said.

“Frankly, there’s been no newbuild in this region over the last 12 months so there’s no reason to expect anything different,” Bill Yardley, president of U.S. transmission and storage at Spectra Energy Corp., said during Energy Dialogues’ recent North American Gas Forum in Washington, D.C. He noted that as more projects come online, including Houston-based Spectra’s AIM and Atlantic Bridge pipelines, the market will be secure.

Lack of infrastructure

While speaking at the North American Gas Forum, FERC Commissioner Tony Clark said that production in the Appalachian Basin is growing at such a rapid rate with similar demand increases that infrastructure, or lack thereof, is completely undermining the Northeast natural gas market.

“It looks a little like a market, but in practice, it’s an electricity construct that fundamentally does not support the infrastructure that’s needed to deliver the energy that the market seems to be signaling that it needs—new pipes, new access-confirmed forms of generation and LNG contracts. There’s a breakdown in the market construct that isn’t allowing that to happen … You have to start building actual infrastructure delivery systems,” he said.

Clark added that this lack of infrastructure is a primary reason for the huge premiums for natural gas in New England and New York this past winter, which put electric generation prices in those markets on par with Hawaii.


Spectra Energy is among several operators helping to open up the Northeast markets for Marcellus and Utica producers through the construction of several pipeline expansions, including its Texas Eastern Appalachia to Market 2014 (TEAM 2014), AIM and Atlantic Bridge projects. The company’s Algonquin Pipeline is one of two systems that currently move Appalachian volumes into New England. Source: Spectra Energy Corp.

“There’s no reason that part of the continental U.S. should have that sort of energy pricing system, but for lack of the infrastructure that’s needed,” he said. “That’s the price that’s paid for lack of adequate gas infrastructure. It’s not that far from Pennsylvania to Boston, it’s really not.”

Another aspect that makes building out infrastructure a challenge is the higher cost to build in the region. The Williams Cos. Inc’s Rory Miller, senior vice president, Atlantic-Gulf, said at the North American Gas Forum that the price per mile to build the 124-mile Constitution Pipeline in Pennsylvania and New York was $4.8 million, even with lower costs for the thinner steel in the pipeline. These savings were undone from the higher costs for labor, permitting, outreach and delays.

The Rockaway Lateral project took seven years to complete as a result of construction delays in the city. The specific issue that held up the pipeline, which is less than four miles long and will serve the New York City boroughs of Queens and Brooklyn, was a route through the Gateway National Recreation Area, a national park. “It literally took an act of Congress [to get authorization] … It was a very slow reaction,” he said.

The short-term remains a big challenge. Yardley noted that as gas-fired power generation has increased from 15% to more than 50% of the electric generation market in New England, most of the power generators hold nearly no firm capacity.

New York securing its future

New York is ahead of the New England market in adding the necessary infrastructure to reduce natural gas prices in the winter and not be as dependent on spot market prices. New York City has been providing financial assistance to building owners to retrofit boilers from fuel oil to natural gas. More importantly, pipeline capacity into New York will increase into this winter with the expansion of Spectra Energy’s Texas Eastern Appalachia to Market 2014 (TEAM 2014) project that was completed in November, and Williams’ Rockaway Lateral and Northeast Connector, also completed ahead of the winter.

The TEAM 2014 project added just under 34 miles of new pipe loop and related compressor stations in Pennsylvania and modified 41 existing facilities along the Texas Eastern Pipeline system in Pennsylvania, West Virginia, Ohio, Kentucky, Tennessee, Alabama and Mississippi to allow for bi-directional flow on the system. This increased capacity to 600 million cubic feet per day (MMcf/d) into the Northeast and Midwest, as well as the Southeast and Gulf Coast.

The two Williams projects will expand the Transco Pipeline capacity into New York through the construction of the 3.2-mile Rockaway Lateral that runs from the Lower New York Bay Lateral to the Rockaway Peninsula. This expansion was necessary as the previous pipeline serving Brooklyn and Queens was built between 40 and 60 years ago and was no longer capable of providing reliable service to the 1.25 million customers in the area.

The Northeast Connector will modify three compressor stations in Pennsylvania and New Jersey in order to expand capacity by 100 MMcf/d on the Transco Pipeline. These two projects are part of the company’s $5 billion in expansion plans for the Transco system from 2013 to 2017 that will expand capacity by 50%.

Social obligation

To really make the market efficient, more infrastructure investments are needed in the production areas. Without the necessary infrastructure investments, the Marcellus and Utica may not fully realize the potential that these large reserves represent.


Pipeline installations such as this one in Noble County, Ohio, are taking place throughout the Appalachian Basin. Dawood Engineering performed as-built survey services for this gathering line, which connected newly completed gas wells to a processing plant outside of Caldwell, Ohio. As-built surveys are critical for the commissioning and maintenance of new pipeline installation and provide accurate records and maps of the buried pipe. Source: Dawood Engineering Inc.

Many midstream operators and producers contend that it makes sense to build and reverse large pipeline systems to transport Marcellus and Utica gas and liquids production to the Gulf Coast. However, Pennsylvania and West Virginia policymakers don’t agree. They say the oil and gas industry has an obligation to do more than simply move resources from the region.

“If billions can be spent to pipe and ship it elsewhere, some of those resources can be used to build and develop infrastructure that will create jobs and investment [in the tri-state area of Pennsylvania, West Virginia and Ohio],” West Virginia Department of Commerce Secretary Keith Burdette said at the recent 2014 Penn State Natural Gas Utilization Conference in Canonsburg, Pa. Further, Burdette said these states had a right to expect this support from the oil and gas industry.

This was a sentiment reiterated by David Peebles, vice president, ASCENT and senior director of the Odebrecht Group at the same conference.

“Business is about creating wealth, not about creating only profits. It’s about investing in infrastructure, investing in people. We have a social obligation to develop economic benefits for the people who work for us,” he said.

Peebles added, “There are a lot of people in the Gulf Coast who don’t know anything about this region. So you’ll read analyst reports that say there’s no infrastructure in this region, but [that’s not the case] when you look at the level of investment taking place in the midstream that is connecting processing plants in Ohio, West Virginia and Pennsylvania. Most important for us, these facilities are putting in de-ethanizers and bi-directional ethane pipelines. There is a high degree of confidence on Odebrecht’s part that we’re going to have the infrastructure.”

This confidence is especially important given that Odebrecht has proposed building a cracker in Parkersburg, W.Va., that will include three polyethylene plants as well as a water treatment plant and a co-generation plant for about $4 billion.

While Peebles declined to comment on when, or if, this project would be built, both Burnette and Henderson said that it was important for the region to have a cracker break ground no matter the location.

“The effort to bring an ethane cracker, or hopefully multiple crackers, to this part of the country is not the development of a facility, but the development of an industry,” Burdette said. By ensuring that some of the production out of the Marcellus and Utica stays in the Northeast, it will benefit each of the three major states in the play by changing the face of industry in the region.

“This is not a competition among West Virginia and Pennsylvania and Ohio. If there is a competition, it’s a competition between this region of the country and the Gulf Coast as well as other locations around the world. …The competition [among the three states], as natural as it may be, to attract ethane crackers to our respective states will subside. We have to figure out how we can work together to create an industry and maximize the resources we are so fortunate to have in our states,” Burdette said.

He added that any crackers built in the region will benefit neighboring states as the locations discussed are close to state borders and will help employ workers from multiple states with about 60% coming from the home state and 40% from the neighboring state. In addition, these projects will help support regional industry growth.


Once completed, the Cornerstone Pipeline will connect MarkWest Midstream’s condensate stabilization facility in Cadiz, Ohio, and Utica East Ohio Midstream’s fractionator in Scio, Ohio, to Marathon Pipe Line’s tank farm in East Sparta, Ohio. Source: Marathon Petroleum Corp.

“This investment can’t be the end of the process. It needs to be one step in a larger effort to reinvigorate manufacturing in our region,” Burdette said.

One of the ways in which Pennsylvania is trying to attract new investments is through the Pennsylvania Resource Manufacturing Tax Credit, which provides up to 5 cents per gallon for companies that use ethane produced in state facilities.

The state received a boost in its efforts to have a cracker built in the commonwealth when Shell announced in early November that it was acquiring land in Monaca, Pa., that could be used to build its proposed $4 billion world-scale cracker in the heart of the Marcellus.

Company officials were quick to point out that this acquisition is not an indication that Shell will construct the cracker, but is instead another step in the decision-making process. The company needs to own the land in order to continue along with permitting applications and other studies.

“This is not a final decision,” Shell spokeswoman Kimberly Windon said in a statement. “This step means that we have determined the site is suitable if we decide to build the proposed cracker.” The company will make a final investment decision once necessary permits are obtained.

Should Shell proceed with construction, the facility would have a capacity of 1.5 million tons per year of ethylene and include three polyethylene units when it would come online in 2019.

These proposals would be supported by MarkWest Energy Partners LP’s systems in the Marcellus and Utica. The company was a first-mover in the play by building gathering, fractionation and processing infrastructure ahead of the explosion of production from the Appalachian Basin.

This has allowed MarkWest to process more than 2 Bcf/d from its Marcellus segment alone as of November. This was more than half of the company’s entire 4 Bcf/d of processed volumes for the year.

Processed volumes in MarkWest’s Utica segment grew 57% to 460 MMcf/d in the third quarter from second-quarter 2014. In the third quarter, the company added 800 MMcf/d of processing capacity and 40,000 bbl/d of fractionation capacity in the Marcellus and Utica.


As crude production out of the Utica increases, pipeline capacity will become more important. Marathon Petroleum Corp. is planning the 50-mile Cornerstone Pipeline project, but it will still depend heavily on truck transportation due to its optionality. The company’s facility in Canton, Ohio, allows the company to unload condensate from up to eight trucks at a time. Source: Marathon Petroleum Corp.

“In total, we’re constructing nine additional processing plants and seven new fractionation facilities to support Marcellus producers. As these major infrastructure projects are completed over the next two years, we will increase our total processing capacity to almost 5 Bcf/d and total NGL fractionation capacity to more than 400,000 bbl/d,” Frank Semple, chairman, president and CEO of MarkWest, said during a conference call to discuss third-quarter earnings.

Utica maturation

The Marcellus has been the focal point for a lot of the early midstream investments, but as Utica production continues to increase, the play is gaining more attention from operators. The growing size and liquids-rich nature of the play is also helping it gain traction.

Pamela K. M. Beall, president of MPLX LP, said most liquids production out of the Utica has been transported by rail and truck but that is starting to change as the play matures.

“While these modes of transportation are effective when production begins, they do not facilitate large-scale growth. Trucks can effectively move small volumes within local markets, while rail and barges provide flexibility to more distant markets, but these methods are not as safe or reliable as pipelines,” she told Midstream Business. “However, even after more pipelines are built [in the Utica], a strong business case can be made to continue truck, rail and barge use. For example, trucks will still be used to gather condensate and deliver to centralized condensate stabilizers. Once stabilized, condensate will be trucked to various terminals along the Ohio River. We also see a need to transport various purity NGLs to local markets,” she added. Rail and barges will continue to provide transportation options for more distant markets, along with pipelines. MPLX and its sponsor, Marathon Petroleum Corp. (MPC), continue to invest in all of these forms of transportation, in addition to proposed pipeline projects to move capacity out of the Utica.

MPLX recently announced the 50-mile Cornerstone Pipeline that will run from Harrison County, Ohio, to the company’s Canton, Ohio, refinery. This project is one part of the company's Utica build-out plan that will seek to further grow midstream infrastructure related to condensate, natural gasoline, butane and diluent transportation, leveraging the extensive existing MPC and MPLX pipeline systems in the region to connect to alternative Midwest markets and Canadian diluent markets.

In addition to pipeline capacity, the Utica also requires development of condensate stabilization and local NGL storage, according to Beall.


Two if by sea: LNG has long played an important role in the New England natural gas market with the Distrigas terminal in Everett, Maine, the first U.S.-based facility to receive a total of 1,000 LNG cargos. Source: GDF Suez Energy NA

“Condensate stabilization is needed to reduce the vapor pressure of the field condensate, so it can safely be stored in atmospheric tankage. Some small stabilizers have recently come online and others are under construction, but to-date, the vapor pressure of much of the Utica condensate is too high for atmospheric storage in the summer,” she said.

MPC is also investing in condensate splitters at its Canton and Catlettsburg, Ky., refineries. The 25,000 bbl/d condensate splitter in Canton started operation in late 2014 and the 35,000 bbl/d Catlettsburg splitter is scheduled to go on-line this spring, according to Beall.

Development of NGL storage is necessary because of the seasonal nature of the propane and butane markets in the Midwest and Northeast, with propane used in the fall for crop-drying and throughout the winter for heating and butane being used in fuel blending to make winter-grade gasoline.

“As Utica and Marcellus production continues, more propane and butane is produced from the local fractionators. Without local NGL storage, these products get transported to storage or export facilities outside of the region only to be shipped back during peak demand periods. This can create logistical constraints that can lead to product shortages like the Midwest experienced for propane last winter,” she added. “Having the storage closer to the marketplace is something we are studying.”

Midterm impact

Results from this November’s midterm elections will have major impacts on the oil and gas industry in the coming years on both the state and federal levels. The changeover in the U.S. Senate majority from Democrats to Republicans is likely to open discussions for crude oil exports and approval of the Keystone XL Pipeline. But on a local level, producers in the Appalachian Basin are likely to face increased costs with the election of Tom Wolfe, a Democrat, as governor in Pennsylvania. Although Wolfe has indicated his administration would support the oil and gas industries, one of his most prominent campaign promises was to impose a 5% severance tax. This could create enough uncertainty in the state that it would suffer from some of the same fears investors have in New England.

This garnered a great deal of attention, but shouldn’t halt production in the region, according to Johnny Dreyer, senior vice president and corporate secretary, Gas Processors Association. “We hope we don’t see a whole lot of change in Pennsylvania,” he told Midstream Business.

At Penn State University’s Midstream PA 2014 conference in State College, Pa., in November, many speakers echoed the sentiments of attendees by noting that there was a great deal of uncertainty over where Pennsylvania’s oil and gas regulations are headed. This raises the possibility of less investment in infrastructure in the state.


Marathon Pipe Line’s Cornerstone Pipeline will offer a multitude of potential delivery options via the MPLX/MPC buildout projects, including Marathon Petroleum’s refinery in Canton, Ohio. Additionally, MPLX is developing a pipeline connection from MarkWest Midstream’s fractionator in Hopedale, Ohio, to the Cornerstone Pipeline. Source: Marathon Pipe Line LLC

“Every time that anybody looks at a project, one of the first things that has to be evaluated is regulatory uncertainty because you can’t start a project and then suddenly get road blocked. You have to work through that at the front of the project rather than after you’re into the project,” Dreyer said.

Though it was the birthplace of oil and gas industries, a number of operators and producers told Midstream Business that Pennsylvania presents a more challenging environment for them to operate in. Compared to Ohio and West Virginia, there is a longer lead time necessary for permitting to be secured due to the strong individual authorities that townships have in the state, which makes statewide regulations more difficult to impose.

“The incorporation of Act 13 [an update of Pennsylvania’s oil and gas regulations] allows municipal governments in Pennsylvania to now have a hand in basically dictating what they will or won’t allow with regard to midstream development,” Gary Slagel, government affairs specialist at Steptoe & Johnson, told Midstream Business. “We are beginning to see some municipalities restrict where pipes can be placed through zoning mechanisms, which is creating problems for midstream companies. It’s very frustrating and each township and borough can come up with something different.”

Pennsylvania still stands to benefit from the Marcellus Shale, but increasing taxes and placing new taxes on producers could take away the state’s cost benefits compared to other regions.

As with any revolution, success isn’t guaranteed in the Northeast as challenges remain but for each challenge there is an opportunity. Those opportunities represent nothing short of transforming the energy and environmental landscape of the Northeast by opening up a new world with cheaper and cleaner energy to the citizens of New England and New York.

Frank Nieto can be reached at fnieto@hartenergy.com or 703-891-4807.

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