Ethane puts Western Pennsylvania drillers in a predicament
For shale-gas drillers, the path to prosperity is reaching far from Pennsylvania.
Europe, Canada and the Gulf Coast — drillers increasingly rely on far-flung markets for some of their gas, even as they wait for permission to ship larger quantities abroad. Consol Energy Inc. this week announced a deal to join gas producers shipping to the European petrochemical industry, following the lead of Range Resources Corp., which helped open a pipeline to Canada last summer.
Drillers are searching for diverse markets, especially to solve a tricky challenge involving ethane. It burns hotter than methane, so it is not allowed in the same pipelines that help heat homes and supply industrial fuel.
Some companies have received waivers to ship ethane through those pipelines, but that is a temporary solution. Drillers in Washington and Greene counties and other areas where ethane is a common product from shale-gas wells need to figure out a better plan.
The dilemma was highlighted last week when ethane concerns caused a small stock sell-off after executives at Chesapeake Energy Corp. said an increase in Appalachian ethane was a drag on its prices, according to analysts at Macquarie Group Ltd.
“If you're going to be bringing that much up, you just better have a way to move it. ... In some cases, it's going to be a decisive element in determining profitability,” said Kent Moors, executive chair of the World Affairs Council of Pittsburgh's global energy symposium. “This is a very unforgiving market. You miss your top line and bottom line for a little bit ... and (investors) just hammer you.”
Demand is so great that there are plans by Sunoco Logistics Partners LP to add a second dedicated pipeline for ethane and propane to a system it just started building to link Washington County and Philadelphia. The Mariner East project faces court challenges from more than a dozen landowners who are fighting the company's efforts to take rights of way by force.
Consol and Range want to use the system to reach European customers through a Philadelphia-area export terminal. By 2016, more drillers could follow. Sunoco Logistics announced in December that it will open discussions on contracts for Mariner East 2, a longer pipeline from Ohio and West Virginia stretching along the same Mariner East path being challenged in court.
These projects for ethane and other liquid gases have started up years before bigger projects planned to export natural gas. The federal government doesn't regulate the export of liquids like ethane and propane, but it does have a say in some natural gas exports. That created a permitting backlog, leaving projects for new multi-billion-dollar export terminals on the drawing board.
There is urgency surrounding ethane because of pipeline limitations. Drillers had waivers to put ethane into the natural gas pipelines, but those waivers are running out if not already expired, said Joe Magner, senior oil and gas analyst with Macquarie.
That means drillers without access to ethane pipelines have to dilute their ethane to put it into the natural gas system. It can be expensive and risky because they have to buy more natural gas, blend the ethane in, then resell all of it. The process itself brings more natural gas onto the market, potentially worsening supply gluts and lowering prices, Magner said.
That gives an advantage to companies that have specially designed ethane pipeline to sell to ethane customers, especially if they signed early to get better prices and access, experts said.
“It just puts other companies that haven't participated in those deals at the whims of market forces,” Magner said. “There really aren't any (alternatives), practically. It's either have access to the projects to ship the (ethane), or blend (it into) your gas stream. That's really not a sustainable solution.”
That's what happened to Chesapeake. It will use a pipeline opening this year to take its Appalachian ethane to petrochemical plants on the Gulf Coast, executives said in a conference call last week.
Range Resources, the dominant driller in Western Pennsylvania, has touted twin export pipelines in addition to the gulf-bound pipeline. Mariner West, which it helped open this summer, goes from Washington County to Ontario. Mariner East is the 70,000-barrel-capacity line from Washington County to the Philadelphia area, which Consol said on Thursday it, too, will use.
Such options worry some civic leaders and businessmen who want that ethane to stay close to home and supply a petrochemical plant such as one that Royal Dutch Shell plc has proposed for Beaver County.
Consol has a deal to supply that plant, too. Industry boosters and analysts have said this competition for ethane isn't an impediment to Shell. They say more markets for ethane, no matter where, will encourage drilling.
Consol mentioned the Shell deal in its announcement, saying both are important to the success of drillers. Company officials declined to say how much they're shipping to Europe or at what cost. They said the buyer is manufacturer INEOS Europe AG.
“This agreement and others like it signify a vote of confidence that the Marcellus shale resource base represents a long-term, reliable energy supply for industrial users both at home and abroad,” Consol president Nick DeIuliis said.
Timothy Puko is a staff writer for Trib Total Media. He can be reached at 412-320-7991 or firstname.lastname@example.org.