The Marcellus Shale is a prolific, gas-producing formation in Pennsylvania and West Virginia, where robust drilling activity has driven huge production growth.
Unlike the Haynesville Shale and other basins that produce primarily natural gas, the Marcellus Shale’s core in southwestern Pennsylvania also contains significant quantities of natural gas liquids (NGL).
This group of heavier hydrocarbons occurs underground with natural gas (methane) and comprises five distinct commodities: ethane, propane, butane, isobutene and natural gasoline.
The price of these hydrocarbons, some of which can replace naphtha and other oil derivatives in industrial and petrochemical processes, has traditionally tracked movements in the price of crude oil.
This liquids content ensured that Range Resources Corp (NYSE: RRC), Cabot Oil & Gas Corp (NYSE: COG) and other leading producers in the Marcellus Shale still earned a decent rate of return when natural-gas prices plummeted to less than $2.00 per million British thermal units during the no-show winter of 2011-12.
That being said, not every part of the Marcellus Shale is created equal.
Whereas drilling activity and production in the liquids-rich southwestern fairway remains robust, lower natural-gas prices prompted operators to curtail production in northeastern Pennsylvania—one of the reasons that throughput volumes often disappointed on PVR Partners LP’s gathering and processing system.
In the near term, producers in this prolific play will contend with a growing oversupply of natural gas and NGLs that will exceed local demand, depressing prices relative to the Gulf Coast and potentially prompting smaller operators that haven’t secured takeaway capacity to rein in production growth.
The growing discrepancy between the price of natural gas at the Leidy Hub near Ellisburg, Penn., and the Henry Hub in Louisiana underscores this challenge.
At MarkWest Energy Partners’ recent Investor and Analyst Meeting, management highlighted four to five natural-gas pipeline projects that midstream operators likely will unveil in coming months to provide additional takeaway capacity out of the Marcellus Shale.
As for natural gas liquids (NGL), rising butane and propane exports from Sunoco Logistics Partners LP’s (NYSE: SXL) will be part of the solution, while DCP Midstream Partners LP’s (NYSE: DPM) terminal in Chesapeake, Va., should start to ship the NGLs internationally this year.
And MarkWest Energy Partners and Kinder Morgan Energy Partners LP (NYSE: KMP) continue to drum up interest in their Utica Marcellus Texas Pipeline (UMTP), which would transport unfractionated NGLs from the Northeast to the Texas Gulf Coast.
Management teams from both master limited partnerships have indicated that producers have expressed interest in the pipeline but have hesitated to take the plunge on long-term commitments. That being said, UMTP or another NGL pipeline out of the Marcellus Shale will be necessary to balance the Northeast market in the next few years.
Elliott and Roger on Oct. 29, 2018
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