Depressed natural gas prices are causing challenges for the energy industry, but analysts say pipeline builders in Western Pennsylvania are largely shielded from the fallout that has resulted in spending cuts by companies that drill and produce gas.
“Pipelines are kind of like owning a toll booth on a highway — once you build them, you’re going to get guaranteed rates; they don’t build them unless you have subscribers,” Frank Nieto, senior editor of Midstream Business and a Marcellus shale researcher at Hart Energy, based in Houston, said Wednesday at the Marcellus-Utica Midstream Conference & Exhibition.
Pipeline companies are in a sweet spot. The drilling boom in Western Pennsylvania has led to a bottleneck in the transmission system that companies rely on to get their gas to markets where it is needed the most. And that means increased demand for pipelines.
“The infrastructure here was vastly underserved,” said Kevin Hyatt, vice president of commercial and business development for Enlink Midstream, headquartered in Dallas. “It’s a scale issue more than anything.”
Pipeline companies are not hit as hard by low oil and gas prices because funding and investment for projects under construction now were finalized months ago, when prices were higher, Nieto said.
The conference, which was sponsored by Hart Energy, drew more than 1,800 people and 200 exhibitors from the oil and gas industry to the David L. Lawrence Convention Center, Downtown. The industry is experiencing the lowest prices in years. Crude oil is at a five-year low, and natural gas is at its lowest price in two years, but industry leaders said they have weathered hard times before.
Despite layoffs and budget cuts from some gas exploration and production companies, more than 50 pipeline projects are under way. These are set to transport Marcellus and Utica shale gas in 2016 and 2017 and won’t be affected by the downturn, analysts said.
Pipeline projects that are still in development, however, will have trouble, said John O’Shea, managing director of Tenaska Inc., based in Omaha, Neb.
“Those projects that are (in) 2018, 2019 may have some economic issues with getting funded,” he said. “You’re not going to see a dramatic shift on the (exploration and production) side in 2015, but most people aren’t hedged for 2016.”
U.S. Steel may have been anticipating those challenges when it made plans to slow pipe-making operations at its plants in Texas and Alabama. The Downtown-based company announced Monday that it may lay off nearly 2,000 workers as low oil prices slow demand for new pipeline investment. The layoffs would be in addition to other cutbacks the company has announced
“There’s probably nothing new coming on,” Nieto said.
Pipeline projects must undergo extensive permitting and regulatory and environmental vetting before construction can begin. It takes drillers about 45 days to drill a well, but in a shale play as big as Marcellus, pipelines can take at least 18 months to build, said Hyatt.
Pipeline companies have benefitted from higher prices for natural gas liquids such as ethane, propane and polypropylene. Prices for gas liquids have decreased, but not as dramatically as dry gas and crude oil, providing support to many companies, Nieto said.
“The effect that low prices have is pretty negligible … liquids wells are still profitable enough to cover up for the dry gas wells right now,” Nieto said. “Liquids are doing pretty well despite the downturn. They’re still profitable, and where the Northeast demand center is at, it’s supporting the industry up here.”
New England power generators remain hungry for Marcellus and Utica gas, but the area remains challenging for pipeline infrastructure because of regulatory and environmental restrictions, said Brian McKerlie, vice president of business development at Houston’s Spectra Energy.
“You have a number of high-value markets at the end of a few pipelines,” he said.
Pipelines are planned as the region’s local electric generators become desperate for gas to power the grid, McKerlie said: “Without the infrastructure making it from supply to the plant, it’s not going to affect the reliability of that plant on a cold, cold winter day.”
This article was written by Katelyn Ferral from The Pittsburgh Tribune-Review and was legally licensed through the NewsCred publisher network.