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REX Pipeline’s Slow Start Driven By Gathering Constraints

As REX Pipeline’s Zone 3 East-to-West (E2W) in-service date has come and gone, REX pipeline is now flowing freely at its new capacity of 1.8 Bcf/d toward the Midwest. Right? Not exactly (see graph below). While REX’s new project has come online, flows remain at about 60% of its total expected capacity. So what’s going on?

With an estimated backlog of 200 wells drilled and awaiting new infrastructure in Ohio, something between the wellhead and REX pipeline is holding the show up. Let’s explore a few possibilities of what’s going on. The first constraint that a molecule could hit on its journey from wellhead to market is the gathering system. It takes time to hook up wells to gathering systems, which could provide a delay in when flows appear. Two of E2W’s announced shippers, Rice and Ascent Resources (formerly American Energy Appalachia), have or will have gathering systems that directly connect their production to REX pipeline. Rice recently brought on their gathering system in the second quarter delivering their 175 MMcf/d of firm commitments to REX pipeline. However, Ascent Resources, which will be using Regency’s Ohio River System (formerly Utica Ohio River pipeline), is waiting for a phased in service in the coming months.

The phased-in service of the Ohio River System provides a view into the next constraint that our molecule could hit once it gets on the gathering system’s mainline and that’s pressure. REX pipeline takes no responsibility for constructing receipt points, so it is up to the gathering system to meet REX’s required receiving pressure of 1,480 psig. For comparison, TETCO’s OPEN project requires pressure between 1,000 to 1,200 psig, depending on the receipt point. This can be a possible obstacle for some systems that deliver to REX pipeline, where gathering system operating pressures can be below 1,000 psig. The Ohio River System will deliver to both REX and TETCO.   The TETCO deliveries are set to begin shortly, while REX deliveries will be offset by about three months. This delay for REX deliveries will allow the pipe to install a booster facility to get their gas up to the correct pressure specifications for deliveries to REX pipeline. The map below shows the relevant gathering systems for REX pipeline with the approximate areas of activity for the producers who have firm commitments on the Zone 3 East-to-West project (Rice, Gulfport, Ascent, and EQT).

As the molecule gets on the mainline and begins to move westward, towards its final market, it can be delivered at one of the four newly modified delivery interconnects with Panhandle, Midwestern, Trunkline, or NGPL. Of the four interconnects, the interconnect with NGPL will receive the most additional capacity from the project, boosting its capacity by 1.75 Bcf/d to facilitate eventual delivery to premium markets in Chicago and the upper Midwest. Unlike receipt points, however, it is REX’s responsibility to modify delivery points so new volumes can be delivered.  Since Tallgrass felt it necessary to adjust the project’s in-service date, it’s probably safe to assume that the promised additional delivery capacity, 3.1 Bcf/d in total, is ready.

Moving beyond physical constraints, there is a constraint that can be placed on a molecule even before it is extracted, and that is price. If the operator feels that their expected realized price does not meet a certain threshold or that realized prices are expected to improve in the future, then they can take alternative actions (or inaction) by curtailing production or delaying completion of drilled wells. Looking at the Marcellus and Utica as a whole, realized prices leave much to be desired, and producers have expressed this not only in the form of production curtailments, but also cuts in investment. This has translated to the Northeast as a whole, once growing at an average of 2.6% month over month in 2014, to a region holding steady with production essentially flat over the last 6 months.

So there are many factors to explain away why REX pipeline has not yet filled, nevertheless, REX pipeline symbolizes changing dynamics in the region. No longer will the Northeast be limited solely by takeaway constraints, which have governed its growth since the advent of the shale boom. And no longer will winners and losers be dictated by the amount of firm transport an operator owns. To understand these changing market dynamics in the Northeast and who will be the winners and losers in the coming era, check out BTU’s recently published Firm Dilemma report.

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Matthew Hoza is a Manager of Energy Analysis for BTU Analytics. Currently he is leading the power team in the development of BTU Analytics’ Power View platform, which provides capacity, generation, and power price outlooks for ISOs and utility areas across the US. Previously, Matthew led the natural gas team that develops and maintains outlooks for natural gas production, demand, pricing, and infrastructure, as well as provided bespoke natural gas market analysis. He holds a M.S. in Finance from the Simon Graduate School of Business at the University of Rochester and B.S. in Physics from Florida State University.

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