Ohio Energy. Workshop J Big Changes Continue to Transform Natural Gas Market Midwest Hydrocarbon Infrastructure Developments

Transcription

1 Ohio Energy Workshop J Big Changes Continue to Transform Natural Gas Market Midwest Hydrocarbon Infrastructure Developments Tuesday, February 20, :45 p.m. to 3 p.m.

2 Biographical Information Mark Jergens, Founder & CEO Midwest Energy Logistics, LLC Columbus, OH Phone: Fax: Website: Mark is a hydrocarbon expert at a time when Ohio is producing more hydrocarbons than ever before. Over the course of his 25-year professional career, Mark has gained a unique and deep wisdom concerning the buying/selling of natural gas, electric power, and NGLs. This knowledge base is derived from thousands of negotiations for physical supply, transportation agreements, contracts, and complex integrated agreements. Mr. Jergens has represented or worked alongside just about every possible participating segment of the energy transaction chain including: large manufacturers, commercial buyers, producers, pipelines, engineers, attorneys, consultants, and marketers. Mr. Jergens is currently the CEO of Midwest Energy Logistics, a company started in 2005 specializing in providing its customers market intelligence and physical transaction excellence. MEL approaches problem solving from a scientific viewpoint and helps its' clients think through biases and the ever-present resistance to change. Mark is also a co-owner of CVR Liquids, LLC which constructs NGL extraction plants and then markets the resulting hydrocarbons. Prior to founding Midwest Energy Logistics and co-founding CVR Liquids, Mr. Jergens was the Chief Commercial Officer at Somerset Gas Transmission, responsible for long-term business development and selling pipeline transportation. Mark has also worked as Vice President of Supply for Constellation Energy where he directed one of the country s largest industrial procurement team s activities. While at Constellation, Mark also had the privilege of working directly with large many energy buyers with significant North American footprints. Mark was also the Co-Founder and former CEO of EnergyGateway (now part of World Energy Exchange) where he worked for the benefit of many prominent Midwest manufacturers. Mark also served as a Vice President with Clinton Energy Management Services where he primarily contributed his expertise to the firm's largest clients. Mark first learned the industry as a logistics expert with one of the pioneering energy marketing companies, Access Energy. Mark has a B.S. in Engineering from The Ohio State University and an Honorary Master s degree in Risk Management. Mr. Jergens now resides near Columbus, OH with his beautiful and talented wife of 22 years, 18-year old son, and 9-year old daughter. Mark is an honorable member of the Kentucky Colonels; a distinction earned through a history of volunteerism and charitable giving. Mark can be reached via at mjergens@midwestenergylogistics.com.

3 Midwest New Hydrocarbon Infrastructure Overview Presented by Midwest Energy Logistics Ohio Energy Conference February 2018

4 2 AGENDA Making sense of the infrastructure in the Marcellus/Utica Shale - 1. Quick review of the fundamental shift in overall hydrocarbon trade movements 2. Understanding total Marcellus/Utica Shale production and how that drives infrastructure needs 3. Outlining the 3-4 year process of building FERC jurisdictional pipelines 4. Reviewing Major Natural Gas Pipeline Projects Rockies Express expansion/reversal, Dominion Lebanon lateral reversal, TETCO OPEN, Transco Leidy SE expansion, Texas Gas partial reversal, Algonquin AIM 5. Reviewing Natural Gas Pipeline Projects - Rover, NEXUS, Atlantic Sunrise, Leach/Mountaineer Xpress, Atlantic Coast, Penn East, Mountain Valley 6. Estimating effect of new infrastructure on regional basis pricing, sunk demand charges, reservoir storage 7. Charting the costs of gathering, processing, fractionation, and transportation inherent in the region. 8. Measuring how much incremental contract risk pipeline companies are taking on by selling projects to producers instead of utilities. 9. How to evaluate producer costs of transportation and the long term fixed demand charges that come with these agreements. 10. Reviewing Natural Gas Liquids Pipeline Projects - Mariner, Utopia, and Cornerstone pipelines. 11. Learn how the least valuable commodity, ethane, drives the decision making of producers.

5 3 Simplified View of Hydrocarbon Industry

6 4 Simplified View of Hydrocarbon Industry Methane Ethane Propane Butane Pentane Oil/Condensate Methane is also the main ingredient in natural gas. It is shipped to consumers via an established pipeline grid. Used as heating fuel, electric generation fuel, and process fuel. Ethane is used in the production of ethylene for making plastics, anti-freeze and detergents; it's a ripening agent for foods, a refrigerant, a substance in producing welding gas. Ethane is a component in natural gas and is removed by cryogenic liquefaction. Primary US consumption of ethane is in Sarnia, ONT, Gulf of Mexico coastal region, and Sandy Hook, PA (export terminal) Propane is commonly used as a fuel for engines, oxy-gas torches, portable stoves, and residential central heating. Primary US consumption is in Northeast states. Butane It is used as a petrol component, as a feedstock for the production of base petrochemicals in steam cracking, as fuel for cigarette lighters and as a propellant in aerosol sprays such as deodorants. Pentanes are some of the primary blowing agents used in the production of polystyrene foam and other foams. Is also used as a solvent or diluent. A mixture of Butane and Pentane is used to mix with Canadian tar sands oil to ease transport. Petroleum products include transportation fuels, fuel oils for heating and electricity generation, asphalt and road oil, and feedstocks for making the chemicals, plastics, and synthetic materials that are in nearly everything we use today.

7 5

8 6

9 7 The Big Picture Natural Gas Flows

10 8 The Big Picture NGL/LPG Flows Propane - Current Ethane - Current

11 9 Marcellus/Utica NG Production Trajectory

12 10 Overbuild of Infrastructure Based on Conditions

13 11 State by State Contributions to Total Production

14 12 Utica/Marcellus Rig Count Recovering

15 13 Important Principles Behind Most New NG Build Projects Producers first had existing pipelines squeeze out new capacity to NE, or turn around. This $ solution didn t last long (huge first mover advantages) Dominion Transmission, Dominion East Ohio Gas, REX, TETCO, Tennessee Then sheer enormity of new volumes forces greenfield builds to move gas to long haul pipelines without direct Utica/Marcellus access ($.50 solutions) Deliver into Texas Gas, Col Gulf, Trunkline, ANR, PEPL, Williams Most new projects funded by producer 15 year commitments, whereas in the past 50 years almost all new projects were funded by regulated utilities shipper commitments ( A credit companies with regulated rate of return) The few projects to get regulated utility support (NEXUS, Atlantic Coast, PennEast) have lagged in gaining binding commitments and have experienced longer FERC/State review times

16 Midwest Natural Gas Pre-2015 Trade Movements Leidy Defiance M3/Z6 Lebanon Clarington LNG Imports Leach 14

17 Midwest Natural Gas Post-2017 Trade Movements 1, 2 Leidy Defiance , 8 M3/Z6 Lebanon 4 Clarington 5 Leach 6, 9 LNG Exports 15

18 16 Pipeline Reversal Projects Dominate Prior to and during this period deliverability is considered poor or bottlenecked resulting in large basis pricing discounts (NYMEX minus $ ) 1. Dominion Lebanon West I & II Reversal/Expansion 0.55 Bcfd TETCO OPEN 0.6 Bcfd Q (new build) 3. TETCO Uniontown to Gas City Bcfd Q (reversal) 4. Leidy Southeast 0.5 Bcfd Q (upgrade of existing pipes) 5. Rockies Express Reversal 1.8 Bcfd Q Algonquin AIM 0.4 Bcfd Q Rockies Express Expansion 0.8 Bcfd Q Other smaller projects 1.0 Bcfd Total New Takeaway Capacity = 6.1 Bcfd

19 17 Dominion Lebanon & Iroquois Projects Owner: Enbridge/Spectra (owners of Texas Eastern) Size: One steel line, mostly in OH, 175 miles, this is a reversal of an existing pipeline Capacity: 0.55 Bcfd from MarkWest Liberty Bluestone Interconnection in Butler County, PA, to the Lebanon-Texas Gas Interconnection with Texas Gas Transmission Corp. in Warren County, OH Started Operation: 0.42 Bcfd in Nov 2013, and then another.13 Bcfd in Nov 2016 Capacity Sold: 100% subscribed Biggest Shippers: RE Gas Capacity Rates: $.15 Supply Sources: MarkWest Liberty Processing plant Major Pipeline Interconnects: Texas Gas (Lebanon)

20 18 TETCO OPEN Pipeline Owner: Enbridge/Spectra (owners of Texas Eastern) Size: One 30 steel line in OH, 76 miles Capacity: 0.55 Bcfd from the Kensington, OH processing hub to Clarington Hub Started Operation: November 2015 Capacity Sold: 100% subscribed Biggest Shippers: Chesapeake, Consol, Total, Rice Capacity Rates: $.20 to Clarington, $.65 to points south on TETCO Supply Sources: Momentum M3 processing hub in Kensington OH Major Pipeline Interconnects: TETCO, REX, Tennessee, DTI. New: Planning on using as supply feeder into NEXUS. MEL forecasted basis value: -$0.55 to -$0.60 at Clarington area

21 19 TETCO Uniontown to Gas City Pipeline Owner: Enbridge/Spectra (owners of Texas Eastern) Size: Existing TETCO lines reversed Capacity: Bcfd from the Uniontown, PA to Lebanon, OH (then further on to Gas City, IN to Panhandle) Started Operation: November 2015 Capacity Sold: 100% subscribed Biggest Shippers: Range, EQT Energy, Rice Drilling, Consol, East Resources Capacity Rates: $.21 to Gas City, IN Supply Sources: Marcellus Dry Gas Major Pipeline Interconnects: PEPL

22 20 Rockies Express Reversal & Expansion Owner: Tallgrass Partners This major project was completed years faster than other FERC jurisdictional projects because its shippers were largely producers with a profit motive to chase the best basis markets Size: One 42 steel line Capacity: 2.6 Bcfd from the Clarington, OH to dozens of interconnects across OH, IN, IL Started Operation: 1.8 Bcfd reversal started Nov 2015, while the 0.8 Bcfd of expansion capacity started in Nov 2016 Capacity Sold: 100% subscribed Biggest Shippers: Antero, Ascent, EQT, Gulfport, Rice Capacity Rates: $ from Clarington to other Zone 3 points Supply Sources: Clarington area supply, MarkWest Seneca processing hub Major Pipeline Interconnects: ANR, NGPL, Midwestern, TCO, PEPL, Trunkline

23 21 New Greenfield Projects Arrive During this period excess deliverability starts to occur, un-bottlenecks Clarington Hub area, but then floods +1 delivery hubs (Defiance, Lebanon, Leach) 1. Rover Pipeline 3.25 Bcfd 1.7 Bcfd In Service (Stark County Issue) 2. Leach XPress 1.53 Bcfd In Service as of Jan 1, NEXUS Pipeline 1.5 Bcfd Q Mountaineer XPress 2.7 Bcfd Q Atlantic Sunrise 1.7 Bcfd Q Penn East 1.0 Bcfd Q (runs largely parallel to Atlantic Sunrise) 7. Mountain Valley 2.0 Bcfd Q (runs largely parallel to Atlantic Coast Pipeline) 8. Atlantic Coast 1.5 Bcfd Q (utility sponsored) Total New Build from = 15 Bcfd

24 22 Rover Pipeline Owner: Energy Transfer Partners (owners of Panhandle, Trunkline, Sunoco) Size: Two 42 steel lines in OH, Single 42 line from Defiance, OH to Vector Pipeline in MI, 711 miles total new build Capacity: 3.25 Bcfd from Eastern Ohio to Defiance, OH, 1.25 Bcfd from Defiance to Vector Pipeline Starts Operation: 0.7 Bcfd started flowing July 2017, 1.7 Bcfd flowing in Jan 2018, remainder scheduled for Mar 2018 Capacity Sold: 98% subscribed Biggest Shippers: Antero, Traverse Midstream, Southwestern, Eclipse, Range Resources, Gulfport, Rice, and EdgeMarc Capacity Rates: $0.55 to Defiance, $.80 to Michigan, $.82 to Gulf Coast via Trunkline Supply Sources: Just about every processing hub in OH, PA, and WV Major Pipeline Interconnects: ANR (Defiance), Panhandle (Defiance), Trunkline (PEPL), Vector (Dawn Hub) MEL forecasted basis value: -$0.05 to -$0.20 at Defiance, depends on backhaul costs on ANR/Trunkline

25 23 Leach XPress Pipeline Owner: TransCanada (formerly CPG) Size: One 36 steel line (with some 30 line), 160 miles Capacity: 1.5 Bcfd from Majorsville Processing hub to Leach, KY Starts Operation: Jan 2018 (now in service) Capacity Sold: 100% subscribed Biggest Shippers: Range, Noble, Kaiser, Ascent (AEP) Capacity Rates: $.40 Supply Sources: Majorsville Processing hub Major Pipeline Interconnects: TCO, Columbia Gulf MEL forecasted basis value: -$0.25 to - $0.35 at Leach

26 24 NEXUS Pipeline Owners: DTE Energy and Enbridge/Spectra (owners of Texas Eastern) Size: One 36 steel line in OH, Single 30 line from Defiance to Vector in MI. 255 miles Capacity: 1.5 Bcfd from the Kensington, OH processing hub to Dawn Hub Starts Operation: Nov 2018 Capacity Sold: 70% subscribed (FERC approved and construction underway) Biggest Shippers: Chesapeake, Consol, Noble, DTE, Enbridge, Col of Ohio Capacity Rates: $.80 to Michigan, $.50 to Ohio Supply Sources: Momentum M3 processing hub in Kensington OH, and the TETCO OPEN Line (yellow lines on map) Major Pipeline Interconnects: MICHCON, ANR, Panhandle, Trunkline (PEPL), smaller Ohio interconnects. MEL forecasted basis value: -$0.10 to -$0.25 at Toledo area

27 25 Mountaineer XPress Pipeline Owner: TransCanada (formerly CPG) Size: One 36 steel line, 165 miles Capacity: 2.7 Bcfd from Majorsville Processing hub to TCO mainline on WV Starts Operation: November 2018 Capacity Sold: 100% subscribed Biggest Shippers: Range, Noble, Kaiser, Ascent (AEP) Capacity Rates: $.40 Supply Sources: Majorsville Processing hub Major Pipeline Interconnects: TCO MEL forecasted basis value: -$0.25 to -$0.35 at interconnect

28 26 Atlantic Sunrise Pipeline Owner: Williams (owners of Transco) Size: One 42 steel line for 125 miles and one 30 line for 57 miles Capacity: 1.7 Bcfd from the Leidy line in PA to Transco Station 85 in Alabama Starts Operation: July 2018 Capacity Sold: 100% subscribed Biggest Shippers: Anadarko, Cabot, Chief, Seneca, Southwestern Energy Capacity Rates: $.38 (tariff) Supply Sources: Leidy Line Major Pipeline Interconnects: Transco MEL forecasted basis value: +$0.25 at VA/NC area

29 27 PennEast Pipeline Owners: AGL Resources, NJR Pipeline Company, Public Service Enterprise Group, South Jersey Industries, Spectra Energy Partners, and UGI Energy Services Size: One 36 steel line for 120 miles Capacity: 1.0 Bcfd from the Leidy, PA area line in PA to Transco Zone 5 Starts Operation: July 2018 (FERC just approved project on Jan 20, 2018) Capacity Sold: 99% subscribed Biggest Shippers: NJ Natural, PSEG, South Jersey, ConEd, UGI, Elizabethtown Gas Capacity Rates: unknown Supply Sources: Leidy Hub, Williams Gathering, Energy Transfer Gathering Major Pipeline Interconnects: Transco, UGI, TCO, Elizabethtown Gas, Algonquin MEL forecasted basis value: +$0.45 at NJ/NY/PA area

30 28 Mountain Valley Pipeline Owners: EQT, NextEra, ConEd Transmission Size: One 42 steel line for 303 miles Capacity: 2.0 Bcfd from Equitrans Pipeline in WV to Transco Zone 5 Starts Operation: November 2018 Capacity Sold: 100% subscribed Biggest Shippers: EQT, Roanoke Gas, USG Properties, WGL Midstream Capacity Rates: $.97 Supply Sources: Equitrans Major Pipeline Interconnects: Transco Z5

31 29 Atlantic Coast Pipeline Owners: Dominion, Duke, Piedmont, Southern Size: One 42 steel line (with some 36 in NC) from Harrison County, WV to North Carolina, 556 miles Capacity: 1.5 Bcfd from the Kensington, OH processing hub to Dawn Hub Starts Operation: November 2019 Capacity Sold: 96% subscribed Biggest Shippers: Dominion, Duke, Piedmont, PSCNC, VNG Capacity Rates: $.50 to VA, $.75 to NC (MEL estimate) Supply Sources: Berne, OH and Natrium, WV processing hubs (owned by Blue Racer) Major Pipeline Interconnects: VEPCO power plants, Duke Progress, Duke Carolinas, Piedmont, PSCNC, VNG MEL forecasted basis value: +$0.25 at VA/NC area

32 30 New Builds & Reversals Help Fill Long Haul Pipes Previously Set Up for South to North Flow #1 Takeaway Don t add these second leg pipelines to the total amount of takeaway capacity from the Marcellus/Utica #2 Takeaway Understand that producer shippers economics are based on both the cost to get their gas to Ohio hub points and the cost to get that same gas to demand centers (LNG export, Petro-Chems, Generation). ANR Pipeline SE Leg Texas Gas Transmission Tennessee Gas Pipeline*

33 31 More Mainlines Turning Around Panhandle & Trunkline Columbia Gulf Transmission

34 32 Incremental Capacity into the US NE Region Slow to Grow MEL Quote: The US East Coast and West Coast are where great energy projects go to die. The US Northeast is the premium market to sell NG, and has severe deliverability issues, but NIMBY, environmental lobby, and government combine to make new projects scarce

35 Midwest Natural Gas Basis Values Toledo Hub Leidy Hub Leidy M2/Z6 Hub Defiance 7 M3/Z6 33 Lebanon Hub Lebanon Leach Clarington Clarington Hub Transco Z5 Hub LNG Exports

36 34 What Producer Shippers Don t Know But Are About to Find Out Producer economics being touted to analysts talk about how participation in new pipeline deals will free them from bottleneck basis discounts This statement is partially true, the spreading out of Marcellus/Utica supply onto a more diverse set of pipelines will bring price relief at Clarington area supply points. But Producers will now have fixed demand/reservation charges on top of processing/gathering fees MEL anticipates that in the period, producers will only be able to recover about 50% of their unused demand fees And Producers will soon learn that many of the long haul pipelines that bring their gas to Gulf demand centers will re-file their tariffs to charge higher rates for 2 nd pipe flow (lesson learned from Tennessee and TETCO in ) Many current backhaul routes are free of fixed charges and fuel retainage

37 35 Key Differences Between the Dry Marcellus and Wet Utica Dry Marcellus Wet Utica Gas generally meeting 1100 Btu tariff threshold (or waiver gas) can be gathered directly into interstate lines TGP alone added hundreds of separate taps from ($3.0 Million/tap) Ethane just gets sold as natural gas, raising Btu factor of stream Breakeven costs can be isolated to methane production Hydrocarbon mix heavy with NGLs/LPGs Production must first be gathered to processing hubs Output from processing hub consists of tail gas (methane and ethane) and the bundle of NGLs/LPGs called Ygrade or Ymix Mega interconnects at processing hubs take tail gas, while separate pipes move Ymix to Fractionation plant Ethane most difficult component to transport due to dew point challenges and is least valuable/wanted NGL Ethane rejected (kept in nat gas stream) to the furthest extent possible. Breakeven cost calculation much more complicated, total hydrocarbon output and values needs to be evaluated

38 36 How Much Does it Cost to Gather, Process, Fractionate, Transport? Dry Marcellus (Producer costs per MMBtu) Prod Cost = $2.00 Net Royalties = $0.15 Gathering = $0.35 Transportation = $0.45 Basis Adjustment = $.10 Wet Utica (Producer costs per MMBtu) Prod Cost = $2.20 Net Royalties = $0.15 Gathering = $0.35 Processing = $0.45 Transportation = $0.25 Basis Adjustment = $.75 Total B/E NYMEX = $4.15 Total B/E NYMEX = $2.75 Basis is defined as the difference between the sales point and the Henry Hub. The Midwest region Basis is generally negative and ranges from -.15 to Producers shifting costs from Basis value of gas to higher transportation costs in order to escape bottlenecks But equation must also include cost of NGL/LPG Fractionation ( per gal) and transport ( per gal) versus value of resulting purity NGLs/Condensate/Oil Not possible or relevant to calculate stand alone nat gas BE

39 37 How to Identify Added Value When Evaluating Pipeline Projects Straightforward analysis IRR Cash flows MLP dividends Basis spreads Added Value (1+1=3) Bifurcation opportunities Connections to other pipelines owned by developer (operational control) Opportunity to re-file tariff rates Supply/Demand balance Increased Risk Producer creditworthiness Producer re-contracting fickleness Utility contracting turnback schedule High cost reservoir storage decontracting (replaced by LNG exports)

40 38 How Positive Bifurcation Works Point B, Demand Center 1 Bcfd Point B, Demand Center 1 Bcfd Now the pipe is moving1.0 Bcfd from C to A and another 1.0 Bcfd from D to B The pipeline collects $.25 in transport fees In this example, let s say that 1.0 Bcfd is flowing from A to B on a 36 pipeline The pipeline collects $.40 in transport fees Total Revenue is thus $146,000,000 Point D, Supply Source 1 Bcfd Point C, Supply Source 1 Bcfd Total Revenue is thus $182,500,000 Point A, Supply Source 1 Bcfd Point A, Demand Source 1 Bcfd

41 39 The NGL/LPG Story Source: Blue Racer

42 40 The Major Utica/Marcellus Processing Players Big 5 Processors: 1. MarkWest (now MPLX) 2. Blue Racer (Caiman/Dom) 3. M3 Momentum (with CHK) 4. Williams (purchase from Caiman) 5. Pennant Midstream (NiSource/Hilcorp

43 41 Marcellus/Utica Processing Hubs Source: MarkWest (now MLPX) Source: M3 Momentum

44 42 NGL Processing & Transportation Source: Blue Racer

45 43 NGL Processing & Transportation Source: Antero Resources

46 44 Mariner East II Owner: Sunoco Logistics (merged into Energy Transfer Partners MLP) Size: One 20 steel lines and one 16 line from Ohio to Philadelphia area (Marcus Hook Marine Terminal), 350 miles Capacity: 20 will move 275,000 b/d initially then expand to 450,000 b/d. The 16 line will move 250,000 b/d. ME 1 is 70,000 b/d. Starts Operation: June 2018 Capacity Sold: 100% subscribed Products: Propane, Butane, Ethane Capacity Rates: $0.14 per gal, $5.88 per barrel (42 gallons in 1 barrel)(mel est.) Supply Sources: Houston, Hopedale, Scio, and Natrium processing hubs Parallels Mariner East I which has capacity for 70,000 Bpd, currently in Propane & Ethane service

47 45 Utopia Pipeline Owner: Kinder Morgan Size: One 12 steel line from Cadiz Processing Hub in Ohio to existing KM pipe in Fulton County, Ohio, 215 miles Capacity: 50,000 b/d initially then expand to 75,000 b/d. Products moving to Sarnia, ONT Starts Operation: January 2018 (In Service) Capacity Sold: 100% subscribed Products: Ethane and Propane Capacity Rates: $0.12 per gal, $5.04 per barrel (42 gallons in 1 barrel) (MEL est.) Supply Sources: Cadiz and Hopedale processing hubs

48 46 Cornerstone Pipeline Owners: MLPX MLP and (soon to be part of Energy Transfer MLP) Size: One 16 steel line from Harrison County Ohio to Canton, OH, 50 miles Capacity: 180,000 b/d Starts Operation: September 2016 Capacity Sold: 100% subscribed Products: condensate, natural gasoline, diluent and butane Capacity Rates: $0.06 per gal, $2.52 per barrel (42 gallons in 1 barrel)(mel est.) Supply Sources: Cadiz, Scio, and Hopedale processing hubs Connects to: Canton refinery, Lima refinery, Toledo refineries through other pipelines

49 47 Proposed Midwest Ethane Crackers 1. Shell Monaca (PA) 1.5 Million Tons, Bechtel/Linde, Approved, Construct Begins 2018, Est. Startup in PTT/Marubeni (OH) 1.0 Million Tons, Bechtel/Flour/JGC-Samsung, Study phase 3. Braskem Odebrecht (WV) 1.0 Million Tons, Re-Evaluation Phase 4. Aither Chemicals (WV), 272,000 Tons, Proposed 5. Appalachian Resins (OH), 275,000 Tons, Proposed 6. Westlake Chemical (KY), 32,000 Tons, Plant Expansion, Under Construction

50 48 Thank You Mark Jergens Midwest Energy Logistics, LLC (614)