July 29, 2020

What’s the issue?

With the recent cancellation of the Atlantic Coast Pipeline, the total capacity of projects that have been canceled or substantially delayed in recent years has grown once again.

Why does it matter?

The cancellation of a project often creates problems for the anchor shippers as the expected capacity is not available when it was planned, but that problem for shippers often creates an opportunity for other pipelines, such as Transco.

What’s our view?

The cancellation/delay in projects requires anchor shippers to remain flexible and often allows for other pipelines to provide an alternative to the disappointed anchor shippers. For instance, MVP and its companion MVP Southgate may benefit from the cancellation of ACP.
 

 
Earlier this month, Duke Energy and Dominion Energy announced that they would no longer be building the Atlantic Coast Pipeline (ACP). That was just the latest in a series of interstate gas pipeline projects that have been delayed or canceled. The delay or outright cancellation of a pipeline project can cause problems for the anchor shippers, who often have planned on the capacity being there on the project’s original in-service date (ISD). However, when one project is delayed or canceled, other pipelines often step forward with options for the anchor shippers. The breadth of those options will often depend on the type of shipper that supported the delayed or canceled project. If the shipper is a producer, the most important aspect of the alternative projects is that they originate in the area of the shipper’s production. Alternatively, if the shipper is an end-user like a utility, the key is that the alternative offer supply service to the territory or facility of the end-user.
 
Today we look at the projects that have been delayed or canceled over the last five years and look at projects that appear to have filled the void for those projects. In particular, we try to discern what that may mean for pipelines that can offer competing alternatives for the most recently delayed or canceled projects, such as ACP and Williams’s Northeast Supply Enhancement Project (NESE), along with several delayed projects that are tracking toward being canceled.

How Big is the Problem?

The contracted capacity of the projects that have been delayed or canceled has grown to over 5 Bcf/day following the cancellation of ACP. Set forth below is the contracted capacity of the anchor shippers for these projects based on each project's original ISD.
20200729 Contracted Capacity by Project
As seen above, the capacity that these projects were to have supplied should have started flowing as early as 2015 for Constitution and as late as this past December for NESE. It will come as no surprise to anyone that all of these projects were along the East Coast, where opposition to fossil fuels has been growing.

As we discuss more fully below, it is important to also understand the type of shippers that were anticipating using this capacity. We have separated the anchor shippers for these projects into two classes, Supply/Push and Demand/Pull. Supply/Push shippers are usually producers in a region looking to move their growing production to lucrative markets. Demand/Pull shippers are typically gas utilities looking to serve growing demand or access lower-priced supplies or electric generators looking to supply a growing fleet of gas-fired power plants.
 
2020-0729_ShipperType.original

As seen above, about one-third of the total capacity on these projects was held by Supply/Push shippers, but most of that capacity was in the earlier years. Demand/Pull shippers have been the predominant type for projects slated to go into service after November 2017. The problems these delayed projects create for these two types of shippers differ, and so we discuss them separately below.

Supply/Push Shippers

Cabot Oil and Gas has been twice bitten by this problem. It had contracted for 500,000 dth/day on Constitution and had a contract for 50,000 dth/day on PennEast. The apparent purpose of both of those contracts was to move Cabot’s production in Northeast Pennsylvania to markets outside of the basin. Similarly, Seneca Resources contracted for almost 500,000 dth/day on its affiliate’s project, Northern Access 2016. Both shippers are listed as being anchor shippers on Williams’s Leidy South project, which just received its certificate on July 17. Seneca has stated that it has a contract for 330,000 dth/day on that project, and Cabot is listed as an anchor shipper for an undisclosed amount of the remaining 250,000 dth/day. It would appear that, for now at least, this Williams project is the beneficiary of the delay/cancellation of these earlier projects. If Leidy South moves forward, Northern Access 2016 may move from the “delayed” to the “formally canceled” category.

Demand/Pull Shippers

National Grid and its affiliates have also been bitten twice by the delay/cancellation issue. It was an anchor shipper of Northeast Energy Direct and on Williams’s NESE project for a combined total of over 500,000 dth/day. But it was not alone in New York City, as Consolidated Edison (ConEd), the other major gas utility, is an anchor shipper on PennEast for 100,000 dth/day. Interestingly, one of National Grid’s apparent alternatives to NESE, Iroquois’s ExC project, was cited by New York State as evidence that NESE was not needed. As we recently discussed in Even Compressor Station Projects Are Controversial - Ask Algonquin and Iroquois, the ExC project is not without controversy and may face a series of delays as well. ConEd appears to also be hedging its reliance on PennEast. Not only has it subscribed for 62,500 dth/day on ExC, but it has also subscribed for the entire 115,000 dth/day capacity on Kinder Morgan’s Tennessee Gas East 300 Upgrade project.

PennEast may be a case study unto itself, as it appears to be cannibalizing its own project. The original PennEast was supposed to have provided over 1 Bcf/day of capacity primarily to Demand/Pull shippers in New Jersey and Pennsylvania. Earlier this year, PennEast applied to separate its project into two phases. The first phase would be the portion of the project in Pennsylvania and would provide 338,000 dth/day of capacity to four of the original project’s anchor shippers: New Jersey Natural Gas Company, South Jersey Gas Company, UGI Energy Services and Elizabethtown Gas Company.

While Tennessee’s East 300 Upgrade project may have taken ConEd from PennEast, a much bigger project may be attracting the remainder of the original shippers. Although still in pre-filing, and not yet disclosing its shippers, Williams’s Regional Energy Access Expansion has stated that it is designed to provide 760,000 dth/day of capacity “from the Marcellus and Utica Shale production areas in northern and eastern Pennsylvania” to delivery points in Pennsylvania, New Jersey and Maryland. While the shippers have not been disclosed, Williams states that it has signed precedent agreements with six anchor shippers and that the capacity will provide those “customers and the markets they serve with greatly enhanced access to Marcellus and Utica Shale supplies, therefore further diversifying fuel supply access.” This certainly sounds like the shippers are Demand/Pull shippers and the capacity is almost exactly the amount no longer being provided by PennEast’s Phase 1. Once again, while Williams may be on the losing end of the NESE delay/cancellation, it may be the beneficiary of the delay on both Northern Access 2016 and PennEast.

ACP Cancellation May Enhance Value of MVP

By looking at these past projects and how existing pipelines and projects may have taken advantage of the vacuum left when others were canceled, we can certainly see how the capacity on MVP and its extension into North Carolina, MVP Southgate, may be enhanced by ACP’s cancellation. MVP is a Supply/Push project anchored primarily by EQT. ACP was a Demand/Pull project anchored by utilities in Virginia and North Carolina. Both projects originated in northwestern West Virginia and both had major interconnects with Williams’s Transcontinental Pipeline (Transco). Assuming that the utilities in Virginia and North Carolina, like National Grid and ConEd, still need the capacity they were seeking and would like to access the Marcellus/Utica region in northwestern West Virginia, MVP would certainly represent a substantial new source of access to that same region and would move that gas as far as Transco and even further on MVP Southgate.

The MVP Southgate project was approved on June 18 and already shares a common shipper with ACP, the Public Service Company of North Carolina, which has subscribed for 300,000 dth/day on Southgate and had subscribed for 100,000 dth/day on ACP. We see three beneficiaries from ACP’s cancellation if MVP can be completed: (1) Transco, as it has a new supply of gas that is sought after by shippers near its system; (2) the Supply/Push shippers on MVP, as the value of their capacity will likely rise; and (3) any other pipeline companies that can supply the service territories of the ACP shippers, as they may find a receptive customer in the former ACP shippers.

 

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