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Driven by the Marcellus and Utica shale plays, Appalachia will easily be the largest supplier of new natural gas in the U.S. In fact, Pennsylvania, West Virginia, and Ohio are the basis of the 700 trillion cubic feet of gas that our nation can produce when prices are $3 per MMBtu or less. For example, breakeven prices in the Marcellus to extract gas are now just $2 for some producers.

Along with mighty Texas of course, the entire nation, particularly the "we like to use gas but don't wanna produce gas" huge importing states of New England (gas is 55% of power), California (gas is 60% of power), New York (gas is 57% of power), and Florida (gas is 67% of power), should be thanking Pennsylvania, West Virginia, and Ohio for supplying increasing amounts of natural gas - now our most vital source of electricity and the fuel that has led to drastic declines in CO2 emissions in the power sector, now at 30-year lows. West Virginia, yes West Virginia, has increased production this year alone by 0.7 Bcf/d to over 4.6 Bcf/d. And as acreage in the Permian basin (our second most vital gas field, after the Marcellus) becomes more expensive (here), the Northeast will become even more important for those states that "like to use but not produce."

Being a new major gas producing region, entire Appalachia needs more gas infrastructure to move gas to markets. We keep hearing about the pushback on pipelines, but make no mistake: the buildout is on. In charge of approving interstate pipelines, FERC in 2016 approved  almost 40 major pipeline projects across the country, covering 1,200 miles, over 14 Bcf/d of new capacity (total national consumption is around 75 Bcf/d), and over $10 billion in new investment.

Most of these pipelines are indeed getting approved in the eastern third of the U.S., with a concentration in the Marcellus and Utica shale states of Pennsylvania, West Virginia, and Ohio. Figure 1 illustrates an overview of FERC's certification process for nine major new pipeline projects in the region. FERC has actually lacked quorum since early-February, and as an independent agency now has two possible Republicans (Neil Chatterjee, Robert Powelson) coming on board with a Democrat (Richard Glick). Perhaps most important is the 100% subscribed, 3.25 Bcf/d Rover pipeline taking Appalachia shale gas into eastern Michigan and up into Dawn Hub in Canada. Rover is so instrumental that when it was first halted for construction by FERC on May 10 natural gas prices actually surged to 14-week highs ("A Single Pipeline's Taking U.S. Gas on a Rollercoaster Ride").

Pipelines are good investments. I've been fixated on the similar to Rover routed NEXUS pipeline, which has not yet been FERC approved but could have a 14% return on equity. And don't forget: due to a "pro-fossil fuel approach," midstream firms jumped in stock price after November's election (from Forbes, "Oil And Gas Industry Buoyed By Trump Election").

Figure 1: Nine Key Northeast Gas Midstream Projects

Screen Shot 2017 06 25

Data source: JTC

The Rover pipeline will be the largest gas pipeline ever constructed in the northeast.

As natural gas continues to rise in the U.S. electric power system, doubling its market share of our power generation to 35% since 2005, more infrastructure to move gas is crucial. Again, a headline not from Fox News but from The New York Times: "Shale Gas to the Climate Rescue."  That fact is clear: more natural gas is the primary reason why the U.S. power sector is UNIQUELY lowering CO2 emissions, when compared to other sectors. Check U.S. Department of Energy data here.

 

So around the country (and globally really), there is a growing push to utilize natural gas to supply reliable electricity, reduce emissions, and cleanly backup intermittent wind and solar power. Just think of New England, where gas is now nearly 60% of all electricity, but many residents remain opposed to more infrastructure to bring that gas in, so unfortunately imports of more expensive and more risky liquefied natural gas from Yemen are required. Take Ohio, a critical incremental gas producing state, pipelines are now maxed, so more are needed to expand production. Measuring 2.6 Bcf/d at the Chandlersville-to-Clarington westbound segment, the Rockies Express pipeline is already 100% utilized.

But, the Northeast gas pipelines are indeed coming, perhaps more than 20 of them, with some 18-20 Bcf/d of new takeaway capacity by 2022. This will allow this once constrained gas market to continually reach even more end-users downstream and increase gas-on-gas competition. In fact, Appalachia  gas will be fueling mushrooming gas power plants across the country and even distant LNG export terminals along the Gulf. Natural gas is surging toward being 50% of all U.S. generation capacity.

 

Indeed, moving forward it will be production that will need to keep up so pipes don't face under utilization rates. Low prices have producers growing within their means. For example, Range and Antero, subscribed to coming pipeline expansion projects Rover and Leach XPress, are currently producing near their full-year 2017 guidance targets, meaning that near-term output growth could be limited. The pipeline build will support multi-year growth plans for U.S. natural gas producers.

More pipelines will allow upstream gas to reach downstream markets that value it highest. U.S. gas consumers should know that our widening pipeline buildout will create more price uniformity across regions, putting your local differential more on par with benchmark Henry Hub. Supply hubs such as Dominion South for the Marcellus has traded at a significant discount (now around a $1 or so) to Henry Hub due to a mismatch between supply and demand in the region. But ultimately, remember that pipelines will expand the customer base but they also allow much more gas to come online, so the impact of them is clearly positive. Expect a 6-8% increase for U.S. gas production by the end of 2018, with even more upside potential long-term: "Trump to Call for U.S. ‘Dominance’ in Global Energy Production."

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