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Facts & Rumors # 314

December 1, 2018

Save these 2019 for Shale Directories Seminars

Utica Midstream
March 21, 2019
Walsh University
North Canton, OH

Upstream PA 2019
April 17, 2019
Penn Stater Conference Center
State College, PA

Latest facts and a rumor from the Marcellus, Utica, Permian, Eagle Ford, Bakken and Niobrara Shale Plays

Appalachian Storage Hub Location.  I have heard from different sources that the Appalachian Storage Hub will be located in West Virginia.  The Parsons Corporation was selected by the Appalachian Development Group to evaluate the five locations identified by the Benedum Study.  The two West Virginia locations in the study are located in these counties: one site covers Tyler, Doddridge and Wetzel counties; the other site covers Roane, Jackson, Putnam and Kanawha counties.

I’m betting my money on the Roane, Jackson, Putnam and Kanawha counties.  (RUMOR)

More Permian Consolidation.   Multi-billion-dollar acquisitions have made headlines this year, as Concho Resources acquired RSP Permian, and Diamondback Energy is about to complete its purchase of Energen Resources.

As the Permian’s unconventional shale play matures and shifts into manufacturing mode, experts said companies will need to scale up to continue their success.

That’s an assessment agreed upon by panelists at the recent Executive Oil Conference presented by Hart Energy

“Consolidation will continue for the next year, year and a half,” said Mike Marziani, executive vice president and chief financial officer, Tall City Exploration III. He said 10 or 15 names could disappear, “not just in the Permian Basin but across the E&P industry.”

While he said that could sound like a negative, “those same dynamics offer opportunities for small companies like us” that can take advantage of the non-core assets shed by the larger companies.

James Walter, co-chief executive officer of Colgate Energy LLC, said “the Permian Basin has always had an independent mind set. We’ll see the independents regroup and come back.”

Chris Atherton, president, EnergyNet, said activist investors appear to be driving at least some activity in the mergers and acquisitions market.

“Activist investors are sable rattling with the public companies, particularly Delaware Basin companies, to divest their lesser acreage,” he said.

Added Walter, “Companies are starting to recognize the value of high-grading their portfolios.”

Marziani said that some acreage doesn’t meet thresholds where they’re worth selling.

His company recently launched its third iteration, backed by up to $500 million in equity financing from the private equity firm Warburg Pincus.

“Our team is focused on the Permian Basin, east of the Midland Basin to west of the Delaware Basin and everywhere in between,” he said. “We’re dedicated to new play concepts. The first Tall City leased in Howard County, 60 miles from the Wolfcamp play. We say there are still places to explore.”

He said with the Permian offering five to seven benches of drilling inventory, there will be opportunities in the churn of acreage as leases turn over because wells weren’t drilled in a timely manner. He said Tall City’s team also “doesn’t shy away from step outs. We’ll take the fairways; we’ll go places that aren’t leased. We also explore three-dimensionally. This basin has scale, and the fact it still has surprises, offers opportunities.”

Walter said Colgate got its start in 2015 putting together a three-section block in Reeves County.

As companies consolidate, said Atherton, “You have this behemoth of a company with inventory they won’t get to for 30 years. They can spin that off to other companies.”

ETP Going to PA Government to Defend Mariner East 2 Service Date. Energy Transfer LP representatives are heading to Pennsylvania’s capital on Thursday for a hearing before utility regulators to defend the company’s plan to put the Sunoco Mariner East 2 natural gas liquids pipe into service by year end.

Energy Transfer wants to temporarily connect an existing 1930s-era 12-inch (30.5 centimeter) pipe to the parts of its long-delayed 20-inch Mariner East 2 pipeline that it has already completed so it can start transporting liquids for customers.

Those customers have been waiting for more than a year to ship liquids on Mariner East 2. When Energy Transfer first started working on the $2.5 billion project in February 2017, it had planned to put the 350-mile (563-kilometer) pipe into service in the third quarter of 2017.

Mariner East 2 and another Energy Transfer project, the Rover natural gas pipe from Ohio to Michigan, were delayed over the past year in part because the projects together racked up more than 800 state and federal permit violations while the company raced to build them.

Those opposed to Energy Transfer’s plans for Mariner East 2 asked the Pennsylvania Public Utility Commission (PUC) to stop construction on Mariner East 2 and also stop the company from transporting liquids on the existing Mariner East 1 pipeline.

The administrative law judge at the PUC scheduled to hear the case on Thursday is Elizabeth Barnes, the same judge who heard a case earlier this year that sought to stop the Mariner East project.

In that case, Judge Barnes ordered Energy Transfer to stop transporting gas on Mariner East 1 and stop work on Mariner East 2 in West Whiteland Township after sinkholes were discovered near the pipeline.

In the latest case, seven residents of Delaware and Chester Counties in southeast Pennsylvania argued Energy Transfer did “not provide adequate notice of procedures sufficient to ensure the safety of the public in the event of a leak or rupture.”

In response, Energy Transfer spokeswoman Lisa Dillinger said in an email “We do not believe the claim is valid…The integrity of our Mariner East 1 and 2 pipelines has been verified in the last few months” by state and federal regulators.

Mariner East transports liquids from the Marcellus and Utica shale fields in western Pennsylvania to customers in the state and elsewhere, including international exports from Energy Transfer’s Marcus Hook complex near Philadelphia.

Cyber Security Importance. A hot topic of discussion in companies today is cyber security — and the energy industry is not immune to all the issues that revolve around cyber security, according to Jim McGlone, chief marketing officer of Virginia-based Kenexis Consulting.

Cyber security is a global issue that affects everyone, he said, addressing the audience at the all-day program entitled “Kallanish New Horizons: Appalachian Basin,” presented Thursday at the Southpointe Business Park, south of Pittsburgh, presented by Kallanish Energy.

“It’s complicated, changing, global and uncertain. Everyone has the problem. It’s a challenge,” McGlone said. “It’s ever-changing and there really isn’t an answer.”

There are, he said, lots of “nasty” people in the world who are willing to “mess with you and your company for reasons that often cannot be explained,” he said.

McGlone, a certified industrial cybersecurity professional, suggested basic steps conference attendees could take to boost their own cyber security, and alternatives they might consider.

That includes microprocessor-based switches and other non-hackable safeguards. And changing the password for their in-home router.

He also questioned whether it is really necessary to connect everything via computer systems that could be hacked.

Winter Gas Markets Rig Higher (Thank you, BTU Analytics) At the end of August 2018, the level of concern about the upcoming winter seemed muted as the December 2018 Henry Hub futures contract traded around $3 despite the fact that US gas storage levels were about 600 Bcf behind the 5-year average at the time. The consensus view could be summarized as new pipeline capacity was coming online in fall 2018 which would allow producers to grow supply to meet winter demand.

Fast forward to November 14, 2018 and new pipelines are online (Nexus and Atlantic Sunrise, for example) and production has grown (Appalachia pipeline production receipt flow samples have consistently sustained over 30 plus Bcf/d this week).  But, like the flick of a switch as the winter gas market rips higher, we are in a demand driven winter gas market where the Henry Hub prompt futures is up over $1.30 this week to $4.80 per MMBtu today.

Gone is the summer 2018 gas market where pipeline constraints limited supply area growth, while supply area basis was weak and summer demand was met with futures not budging above $3 per MMBtu. In the current market, demand has grown faster than producers can respond with production gains. What has changed in the market going into winter 2018-2019? Supply, demand, and pipe capacity have all grown. As shown below, monthly modeled supply has grown across many supply basins year-over-year, with Appalachia leading the way at 4.0 Bcf/d thanks in part due to new pipe capacity. The challenge is demand has also structurally moved higher.

US Dry Gas Production Nov 2018 vs. Nov 2017

Looking at a demand sample (deliveries off of interstate pipelines) of regional demand by facility type, comparing November 2017 vs 2018, the 4.0 Bcf/d of Appalachian production growth is being soaked up by 3.4 Bcf/d of either Appalachian demand or adjacent regional demand to Appalachia, as shown in green below. The Southeast power, LDC and Atlantic Seaboard LNG (Cove Point) components represent the three largest year-over-year gains.

Incremental Demand for First Two Weeks Nov 2017 vs Nov 2018 With Transco connecting Appalachia, the Atlantic Seaboard, and the Southeast, we can see below the impact on pipeline flows as winter demand has ramped up. Atlantic Sunrise started service October 6, 2018 and the increased volumes can be seen as flows south at the Virginia-North Carolina border approached 2 Bcf/d. As the recent ramp in demand has started (and note we are only talking about ‘November cold’ here) flows south on Transco have dropped by about 700 Mcf/d.

Transco Mainline Flows Nov 2018

It seems the market finally cares about the 600 plus Bcf storage deficit to the five-year average and how much producers can ramp supply going into winter as the winter 2018-2019 strip is now priced over $4.50 per MMBtu, while the summer strip 2019 is below $2.80 per MMBtu. What does this mean as we roll into the peak winter months of January and February? How much inventory are producers carrying into winter? To access BTU Analytics’ view on Henry Hub and basis pricing, subscribe to the Northeast Gas Outlook service.

Important PA Supreme Court Ruling.  Justices to decide whether rule of capture applies to fracking. The Pennsylvania Supreme Court is set to determine whether the rule of capture, which precludes trespass liability for drillers where oil and gas drains from surrounding lands in the course of conventional extraction from an underground pool, applies where shale gas is extracted through hydraulic fracturing. In an apparent case of first impression, the Pennsylvania Superior Court ruled earlier this year that it does not. On Nov. 20, the high court issued a one-page order agreeing to consider a single question on appeal: “Does the rule of capture apply to oil and gas produced from wells that were completed using hydraulic fracturing and preclude trespass liability for allegedly draining oil or gas from under nearby property, where the well is drilled solely on and beneath the driller’s own property and the hydraulic fracturing fluids are injected solely on or beneath the driller’s own property? “The case has drawn heavy amicus interest from industry organizations including the Marcellus Shale Coalition, the American Exploration & Production Council, the Pennsylvania Chamber of Business and Industry, the Pennsylvania Independent Oil & Gas Association, the Independent Petroleum Association of America and the American Petroleum Institute.

Real Trouble for Atlantic Coast Pipeline.  The U.S. Army Corps of Engineers has suspended a national permit for the Atlantic Coast Pipeline to cross more than 1,500 streams in three states, raising a potential new barrier for construction of the project through Virginia. About half of the 600-mile pipeline would be built in Virginia from West Virginia to North Carolina, but Dominion Energy and its partners are still waiting for federal regulators to allow them to proceed with construction here. The Army Corps’ offices in Norfolk, Wilmington, N.C., and Pittsburgh issued orders late Tuesday to suspend the Nationwide 12 permit’s use for the project’s stream crossings. Dominion spokeswoman Jen Kostyniuk said the company had voluntarily offered to suspend the permit for all three states while attempting to resolve issues from a decision by the 4th U.S. Circuit Court of Appeals earlier this month. In that decision, the court issued a temporary stay of the permit for stream and river crossings in West Virginia.

ExxonMobil Using Renewables for Electricity in the Permian.  Exxon has inked a 12-year deal with Danish renewable energy company Orsted to buy 500 MW of electricity produced by solar and wind farms to power its oil production in the Permian, Bloomberg reports.

Although the terms of the contract remained undisclosed, it is the largest such contract featuring an oil company as a party, Bloomberg new Energy Finance commented.

“We frequently evaluate opportunities to diversify our power supply and ensure competitive costs,” Exxon spokeswoman Julie King told Bloomberg in a statement. The company has been the target of a lot of criticism—and lawsuits—regarding its attitude to climate change and renewable energy use. Yet now that solar and wind power is becoming cheaper and demand for the commodity in the Permian is soaring, the time is apparently right for Exxon to start changing.

The electricity Exxon will be buying from Orsted will be produced at two farms, one solar and one wind—both which are still under construction. The Sage Draw wind farm will be completed in 2020 and the Permian Solar farm will be launched in 2021.

The Permian is the shale play where production is growing the fastest and with it demand for electricity is growing, too. Bloomberg reports that just one part of the Permian, the Delaware Basin, consumed 350 MW of electricity this summer, which was triple the consumption three years ago. This amount is enough to power almost 300,000 households and it is set for another triple increase, according to utilities, in the next four years.

New FERC Commissioner.   A Senate committee has voted to confirm fossil fuel advocate and Department of Energy staffer Bernard McNamee to a vacancy on the Federal Energy Regulatory Commission, Kallanish Energy reports.

On Tuesday, the Energy and Natural Resources Committee voted 13-10 to approve McNamee’s nomination by President Trump.

McNamee’s nomination was approved by the committee’s 12 Republicans plus U.S. Sen. Joe Manchin, Democrat-West Virginia.

The nomination now goes to the full U.S. Senate and a vote is possible before Dec. 31.

McNamee is a former anti-renewables activist who did pro-fossil fuel work at the Texas Public Policy Foundation, a conservative think tank that has opposed wind power projects.

He also worked on the Department of Energy’s controversial coal and nuclear bailout plan that was rejected by Ferc last January. That plan has strong support within the Trump administration.

OH EPA Seeking Input on PTTGC Permit.  The Ohio Environmental Protection Agency is seeking public input on a second permit for the proposed ethane cracker plant at Shadyside in Eastern Ohio’s Belmont County.

The agency will hold a public information session Dec. 12 on draft modifications to the wastewater discharge permit for the $6 billion petrochemical complex proposed by PTT Global Chemical America. A public hearing will immediately follow the first session that night.

The Epa said the modifications to the wastewater permit would decrease the levels of pollutants released into the Ohio River, change the locations from which storm water will be discharged and modifies the limits at an internal monitoring station that does not directly discharge to the surface water.

The Ohio draft permit is available for public review at the agency’s district office in Logan, Ohio. The Epa will accept comment on the draft wastewater permit through Dec. 19. They may be submitted at epa.dswcomments@epa.ohio.gov.

Thailand-based PTT has not yet made a final investment decision on the Ohio ethane cracker.

It is also seeking an air permit from the Ohio Epa. A public hearing was held last night (Nov. 27) in Shadyside.

The plant, if approved and if built, annually would produce 1.5 million tons of ethylene and other materials. The plant would use six ethane cracking furnaces and manufacture ethylene, high-quality polyethylene and linear low-density polyethylene.

The EPA will accept public comment on the draft air permit through Dec. 11. Comments may be sent to Kimbra.reinbold@epa.ohio.gov.

Earlier this year, PTT approved an agreement with a subsidiary of Daelim Industrial Co. Ltd., a leading Korean construction and chemical company, to conduct a feasibility study and to secure funding for the Ohio petrochemical complex.

PTT Global Chemical America is a subsidiary of PTT Global Chemical, Thailand’s largest integrated petrochemical company.

Royal Dutch Shell is building a similar ethane cracker in Beaver County, Pennsylvania, northwest of Pittsburgh.

The plants would take ethane from drilling in the Utica and Marcellus shales and turn it into ethylene and polyethylene for making plastics.

Permian NatGas at $0.  Permian natural gas markets felt a cold shiver this week, but not a meteorologically induced one of the type running through other regional markets. Gas marketers braced as prices for Permian natural gas skidded toward a new threshold: zero! That’s not basis, but absolute price, a long-anticipated possibility that became a reality on Monday. The cause is very likely driven, in our view, by continued associated gas production growth poured into a region that won’t see new greenfield pipeline capacity for at least 10 months. What happens next isn’t clear, but expect Permian gas market participants to be a little excitable or jittery the next few months. In today’s blog, “Keep Breathin’ – Sky Falls For Permian Gas Prices on Cyber Monday,” Jason Ferguson reviews this latest complication for Permian natural gas markets.

Mountain Valley Completion Still 4th Qtr. 2019.  EQM Midstream Partners LP said on Wednesday it still expected to complete the $4.6 billion Mountain Valley natural gas pipeline from West Virginia to Virginia in the fourth quarter of 2019 despite a legal opinion explaining why an appeals court vacated a water permit for the project.

The U.S. Court of Appeals for the Fourth Circuit issued the opinion late Tuesday explaining why it sided with environmental groups in October and decided to vacate the so-called Nationwide Permit 12 that allows the pipeline to cross rivers in West Virginia.

In the opinion, the court said the project’s proposed construction methods violated a special condition put forward by West Virginia, requiring stream crossings to be completed within 72 hours.

The court also pointed to another special condition requiring projects to obtain state water quality certification for pipelines bigger than 36 inches (91.4 centimeters) in diameter. Mountain Valley has a 42-inch pipeline.

West Virginia is in the process of modifying the special conditions to allow Mountain Valley and another gas pipe, Dominion Energy Inc.’s Atlantic Coast, to move forward.

Analysts at Height Capital Markets in Washington said they expect West Virginia’s Department of Environmental Protection to issue the modified special conditions by the end of year, allowing Mountain Valley to seek a new permit from the Army Corps.

Permits Nov 15-Nov 29, 2018

Joe Barone jbarone@shaledirectories.com
610.764.1232

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