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Road Work Ahead: The Midwest Employs Permanent Detours

September 20, 2018 | Rishi Iyengar

The Midwest today is a battleground for gas supply from various sources in the lower 48 U.S., competing for market share and creating displacement pressure. A market that has historically been the target for gas supplies from Canada, the Rockies, Oklahoma, and more recently Appalachia, the Midwest is contending with a flood of new inflows from the Marcellus and Utica Shale being brought in primarily by Rover Pipeline causing the routes natural gas travels within the Midwest to undergo permanent detours.

Among other impacts, growing imports into the Midwest is encouraging increased southbound flows into the Southeast, linking the Midwest market with the expectation of demand growth in the Gulf Coast from LNG exports, power and industrial demand growth — similar to the aim of infrastructure projects taking place in the Appalachia, SCOOP/STACK and the Permian.

In this edition of Get the Point, we will examine the specific impacts of this second wave of inflowing projects from the Appalachia on Midwest flows, as well as what detours have been put into place or are yet to come, and how the increased Southbound flows and other detours can be expected to materialize.

In order to put the Rover impact in the context of a broader view of Midwest flows, we will first take a look at a concurrent story that revolves around the Midwest’s import and export relationship with Canada.

Canadian Gas Battling Northeast and Bakken Production for Midwest Market Share

The Midwest both imports and exports gas to Canada, and plays a key role in the flow dynamics of Western Canadian gas supplies. Examining the shifts that have occurred in some of these import/export relationships provides a view on the pressures being put against Western Canadian gas exports – where Canadian gas is losing out, as well as where it has been defending its market share.

For a lay of the land, Western Canadian gas flows into the Midwest through Northern Border and Alliance pipelines (which are the primary suppliers of the Joliet Hub located south of Chicago, Ill.), and is also imported at Emerson Minn., primarily by Great Lakes Gas Transmission. Some of those imports are re-exported from Great Lakes at St. Clair, Mich. into the Dawn Hub in Ontario, Canada. Dawn is also supplied by Vector Pipeline, traditionally with supply sourced from Joliet, and by Panhandle, traditionally with supply sourced from the Oklahoma and Kansas producing areas.

Source: OPIS PointLogic

The first shift in this dynamic is that less Canadian gas is being imported into Northern Border, where imports continue to get pushed back due to production growth coming out of the Bakken. Bakken production has ramped up over the last 10 years, with the associated gas growing from minimal volumes to now 1.6 Bcf/d. Northern Border directly absorbs some Bakken gas, and also receives some through interconnect receipts from WBI Energy Transmission. Over time as Bakken production has increased, it has displaced and pushed back some of the Canadian imports coming in at Port of Morgan. Capacity on Northern Border downstream of the Bakken is about 2.5 Bcf/d, and the share of domestic supply has grown to now nearly 50%, a trend we can expect to continue as long as oil-focused production growth continues to occur in the Bakken.

Source: OPIS PointLogic

The second shift is two-fold. Imports of Canadian gas into the Midwest at Emerson have increased significantly over the last 18 months, growing not only larger but also less seasonal in nature. Simultaneously, Midwest exports at St. Clair (gas on Vector, Panhandle, Great Lakes, and MichCon flowing from Michigan into Dawn) have increased.

Source: OPIS PointLogic

Analysis of flow data at the pipeline level shows that Great Lakes pipeline is responsible for both of these shifts, importing the additional Canadian gas at Emerson, and re-exporting additional volumes into Dawn at St. Clair. Looking further upstream, we see that the root cause of this shift is TransCanada. In November 2017, TransCanada instituted the Dawn Long Term Fixed Price (Dawn LTFP), which provided long term fixed price tolling rates on TransCanada’s Mainline from Empress to Dawn at rates competitive with Northeast projects targeting the Dawn market. TransCanada Mainline flows at Empress (the origin of the TC Mainline in Alberta where Western Canadian gas is received from NGTL) saw a significant uptick in response to the lower rates.

Downstream of Empress, an increasing amount of Mainline volumes have been flowing across Emerson into the Great Lakes system and in turn into Dawn. In fact, Great Lakes deliveries into Dawn now account for 27% of Mainline flows at Empress, compared to just 9% during the previous year. What this ultimately shows is that the reduced tolling rates on TransCanada have facilitated a fairly substantial increase in the amount of Western Canadian gas that is being delivered into the Dawn market, and that these increased flows are reaching Dawn via Great Lakes.

Source: OPIS PointLogic

From Dawn’s perspective, more of its requirements are now being satisfied by what is essentially Western Canadian gas coming in on Great Lakes. It’s important to note that Dawn’s requirements are larger this year, primarily because Dawn storage inventories are at a deficit to the 5-year average, and added supplies and stronger storage injections have been necessary to make up that storage deficit this summer. But in terms of the supply sources supporting Dawn, the two major sources of inflows are Vector and Great Lakes, and we see Great Lakes taking on a more dominant role in supplying Dawn, while Vector is at best maintaining its status quo.

Source: OPIS PointLogic

Flood of Appalachia Gas Causing Permanent Detours in Midwest Flow Dynamics

For context, the floodgates first opened in 2015 with the reversal and continued expansion of Rockies Express Pipeline(REX), providing capacity for Appalachia gas to flow east-to-west within Zone 3, a segment that traditionally sourced its supply from Rockies gas flowing west-to-east. But Rockies gas hasn’t been pushed back – even today west-to-east flows into Zone 3 are running at 90+% utilization.

Source: Tallgrass EBB, OPIS PointLogic

It has been increasing deliveries to various Zone 3 interconnects spanning Illinois to Ohio that have absorbed the vast majority of the increasing influx of Appalachia gas on REX. Expanded delivery interconnects with NGPL at Moultrie, Ill. and ANR at Shelbyville, Ind. are seeing increasing utilization as more and more Appalachia gas has made its way into the Midwest on REX. Past projects on ANR and NGPL have made portions of those pipelines bi-directional south of REX and have provided an outlet for the increasing REX deliveries to flow southbound towards Gulf Coast markets.

Source: OPIS PointLogic

Of course the next wave has come from the onset of Rover Pipeline, and here we will dive into its specific impacts on Midwest flow dynamics as Phase 1 and Phase 2 have come online. The following schematic is a simplified representation of the part of the interstate grid relevant to the impact of Rover.

Source: OPIS PointLogic

Rover Phase 1 came online in Fall 2017, and brought Appalachia gas into the Defiance Hub, specifically into interconnects with ANR Pipeline and Panhandle Eastern. Two impacts: the first of which was on ANR, which absorbed the majority of Phase 1 volumes. ANR pushed incremental volumes both north and southbound from Defiance (green arrows in the below schematic). Second was a pushback of upstream supply on Panhandle (pink arrows), which delivered that length to its interconnect with Trunkline Gas (blue arrow).

Source: OPIS PointLogic

Southbound flows on ANR’s Southeast Mainline, measured at the Brownsville compressor in Tennessee, have risen significantly since ANR began receiving Rover gas at Defiance as did deliveries from ANR into Michigan storage facilities.

Source: OPIS PointLogic

Fast forward to June 2018, Rover Phase 2 (red color arrow in the below schematic) went into service, providing the ability to deliver more than 900 MMcf/d into Vector Pipeline. What has occurred since Phase 2 began operations, and what we can expect to see in even greater magnitude once NEXUS (blue arrow) comes online, is that the volume of gas that Vector (orange arrow) needs to pull from Joliet is greatly reduced. That creates a pushback of supply at Joliet that needs to find a home, and so far it has been ANR (light green arrow) that has served as the conduit for the increased length at Joliet, sending increased volumes north into Northern Illinois and Wisconsin. ANR is backfilling the gap left from Great Lakes decreasing deliveries in Wisconsin as Great Lakes has instead increased deliveries to Dawn.

Source: OPIS PointLogic

In fact, the impact of Rover’s displacement of Joliet supply on Vector has been a nearly 1-for-1 push into increased ANR outflows from Joliet.

Source: OPIS PointLogic

In order to facilitate increased northbound outflows onto ANR from Joliet, ANR is putting in place an expansion of the system north of Joliet, adding 200 MMcf/d of incremental capacity into Northern Illinois and Wisconsin. The Wisconsin South Expansion project is expected to come online in November 2018.

Source: TransCanada Investor Presentation

According to an OPIS PointLogic’s analysis, ANR has handled the influx of Rover gas into the Midwest, both by directly re-routing Phase 1 volumes south of Defiance towards the Southeast, and by relieving the length at Joliet created by Rover’s displacement of supply on Vector.

But NGPL may also soon begin to route Midwest gas towards the Gulf Coast via their Gulf Coast Expansion Project. NGPL has a pending request into FERC for in-service approval by Oct. 1. Nearly all of Phase 1 capacity has already been subscribed by Corpus Christi LNG, which is currently undergoing pre-commissioning activities.

Source: Kinder Morgan Investor Presentation, OPIS PointLogic

But aside from new capacity, there is also under-utilized southbound capacity on existing pipelines, such as Trunkline, Texas Gas, and Midwestern, that we can expect will become increasingly utilized as all options get put on the table in terms of moving gas southbound from the Midwest towards the Gulf Coast. All of this underscores the fact that the Midwest will increasingly serve as a re-routing zone for growing Appalachia production to reach demand growth along the Gulf Coast. To put it another way, even Appalachian takeaway projects that are heading to the Midwest are in reality sending gas to the Southeast.

In fact, this is a phenomenon that was observed just a few weeks ago when Rover Pipeline brought its Burgettstown and Majorsville supply laterals online. Production receipts on Rover increased by around 400 MMcf/d, and the vast majority of the increased supply was delivered into Panhandle, causing further pushback on its upstream supplies. Consequently, Panhandle deliveries into Trunkline increased by 400 MMcf/d, and in turn Trunkline saw a significant and immediate increase in southbound flows.

The increasing linkage between Lower Midcon supply, Midwest length, and Gulf Coast LNG

As we have seen, the detours and new capacity for re-routing Appalachia production growth through the Midwest towards the Southeast primarily targets Gulf Coast LNG export markets. Elsewhere in the Midcon, the gas takeaway options under development out of the growing SCOOP/STACK plays are also primarily targeting Gulf Coast LNG. OPIS PointLogic is tracking nearly 3 Bcf/d of projects aimed at getting gas out of Oklahoma’s SCOOP and STACK plays.

And so the Midwest joins a long line of other regions and producing areas that are increasingly linked to the expectation of LNG export demand growth along the Gulf Coast.

In October 2018, OPIS PointLogic will be releasing the Gas Week Midcontinent report, supply demand fundamentals and market intelligence for the Plains, Midwest, and Lower Midcon sub-regions. This regional report will provide both a high level summary view as well as a deep dive into the intricacies of what is becoming an increasingly complex region. For more info, please contact pointlogic-sales@opisnet.com.