A trio of Texans has targeted the Marcellus/Utica region for one more round of natural gas liquids logistics projects designed to expand connections to global markets. The stakes are high. The winning project will channel NGLs to either the U.S. Gulf Coast – with its millions of barrels in underground storage capacity, access to multiple loading terminals, and connections to the largest petrochemical feedstock market in the world – or to the East Coast, with its smaller but rapidly expanding storage and distribution complex at Marcus Hook, Pennsylvania. In the current low price environment, producers are now weighing their alternatives very carefully. We believe the likely winner of this high stakes game will be Sunoco Logistics’ new Mariner East pipeline to the Marcus Hook terminal, especially now that the acquisition of the Williams Companies (NYSE:WMB) by Energy Transfer, Sunoco’s general partner parent company, is moving forward.

The players in the Marcellus round are Houston-based Enterprise Products Partners (NYSE:EPD), Kelcy Warren’s Dallas-based Energy Transfer Partners (NYSE:ETP), which is the general partner of Sunoco Logistics (NYSE:SXL) through a controlled subsidiary, and Rich Kinder’s Kinder Morgan (NYSE:KMI).

Even though the projects share the same financial goal of increasing throughput fees for their sponsors, they differ in scope and in their progress:

The Kinder project involves converting a gas pipeline, which once moved gas from the Gulf Coast to the Northeast, and adding over 200 miles of new pipeline to connect the Louisiana end to Mont Belvieu. This project is estimated to have a capacity of 430,000 barrels per day. Previously launched as a joint effort that included MarkWest Energy Partners, the project has extended its open season offering capacity on the line to prospective shippers, until year-end 2015. If the open season is successful, the line could be in service by the end of 2018.

The Enterprise project involves converting the Centennial pipeline, jointly owned by Enterprise and Marathon, which was formerly used for shipments of refined products from the Gulf Coast to the Midwest, and building connections to sources of NGL volumes. Its capacity is estimated to be 100,000 barrels per day. This project is currently in the evaluation stage, with an estimated construction phase of 18 to 24 months following the final investment decision before it is placed in service.

The Sunoco Logistics Mariner East 2 project involves building about 350 miles of new pipeline from Ohio to Marcus Hook, mostly along the route of its current Mariner East line, to bring NGLs from both the Utica and Marcellus shale plays to its terminal. Its initial capacity is estimated to be 275,000 barrels per day. The line is currently under construction, and expected to be in service by late 2016.

In the meantime, producers in the region have suffered through a long, hot, and expensive summer. The NGL revenues which provided a nice boost to producer cash flows in earlier years have dwindled as increased production necessitates moving barrels farther away from the producing area for storage or export during the summer. Figure 2 illustrates the pain level experienced by a producer who must remove some of the ethane in the gas stream to meet pipeline Btu requirements. Since there is currently no ethylene market in the Northeast, the Enterprise ATEX ethane pipeline to Mont Belvieu provides assured flow, but at a cost – for now.

Given this scenario, the prospect of exporting ethane later this year on Mariner East 1, to a different target market in Northwest Europe, makes moving additional barrels east to Marcus Hook more attractive. The new Mariner East 2 line will expand capacity to move other NGLs as well, adding more propane and butane to the volumes that can move to an East Coast port via pipeline in summer 2017. The critical questions would seem to be whether additional capacity will already be needed by the time the other projects can be in service, and whether access to the US Gulf Coast market is valuable enough to support additional investment for one or more Gulf Coast pipeline connections. Since transit time to Asia from Marcus Hook is only about two days longer than from the Gulf Coast, and since Marcus Hook is closer to some Atlantic basin markets than Houston, the key issue would appear to be whether the smaller port can handle the traffic efficiently.

With regard to volumes, our current projections show that producers could continue to develop their reserves without another pipeline after Mariner East 2, but if ethane demand increases in the Gulf Coast to levels that produce a positive value they could be sacrificing some upside on ethane recoveries post-2020. Given that capacity seems adequate at least until then, we believe that the focus in the midstream arena over the next few years will be on building gas takeaway. The Mariner East 2 and Marcus Hook projects will need to prove an effective and economical outlet for producers to retain the lead in the race to the world markets, but for now they appear to have the winning hand.
Source: Wood Mackenzie