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Marcellus players eye downstream ties

Dallas' Range Resources to supply Calgary-based Nova Chemicals

Pennsylvania’s shale-gas producers may have taken the first steps towards downstream integration as Dallas-based Range Resources signed an agreement to supply ethane feedstocks for petrochemical production.

The deal, the first of its kind, will see Range supply Calgary-based Nova Chemicals with an undisclosed volume of the natural gas liquids (NGLs) for transport to Sarnia – a refining and petrochemicals hub in the Canadian province of Ontario. Range said construction of Sunoco’s Mariner West pipeline to the international border of Marysville, Michigan, will facilitate exports from the US to Canada from 2013.

Chief executive John Pinkerton said Range will be a “pioneer” in developing downstream markets for unconventional gas and NGLs. "This is an important milestone in the development of the Marcellus Shale. After years of planning and studying alternative solutions, this project is the first in a series expected to service the growing liquids-rich area of the Marcellus Shale,” he said.

Downstream diversification

Interest in downstream diversification is catching on among North America’s unconventional-gas producers, which have seen prices for production fall even as they have had great success adding new reserves. The Appalachian region alone accounts for about 2.5 billion cubic feet a day (cf/d) of output and the US Geological Survey estimates that the Marcellus holds 84 trillion cf of undiscovered, recoverable natural gas.

But prohibitively low natural gas prices – the Nymex forward strip is about $4/million British thermal units heading into the peak winter demand season – are prompting a shift into NGLs to offset low returns from the gas, which is barely economic at these prices. The liquids, which receive oil-based pricing, are worth four times more than the gas on an energy-equivalent basis and companies such as Range and Oklahoma’s Chesapeake Energy are scrambling to ramp up NGLs output from the liquids-rich shale plays of Pennsylvania, Texas and now Ohio.

Shale drilling unabated

According to Macquarie Securities, drilling in the US shale basins continues unabated despite the bearish gas-price outlook and stands some 20% higher than last year. About half of the 1,900-strong rig fleet – or 936 rigs – are chasing unconventional-gas and liquids targets. According to Schlumberger, 1,330 are drilling horizontal or directional wells – a hallmark of unconventional drilling – which is also up by more than 20% from last year.

Finding outlets for all that new production is the new problem for Pennsylvania’s shale industry, given a lack of modern oil and gas transportation and processing infrastructure. In addition, the US northeast suffers from a shortage of capacity to process the ethane feedstocks into petrochemicals such as polyethylene and plastics.

But after decades of shuttering facilities and shifting operations overseas, there are signs that the big petrochemical players are set to return to North America in a big way. In June, Shell confirmed plans for a world-scale cracker to process Marcellus NGLs production, joining Chevron, Dow Chemical and LyondellBasell, which have also expressed interest in building new petrochemicals facilities in the US.

GTL alternative

In Canada, meanwhile, Talisman Energy is in a joint-venture with South Africa’s Sasol to explore the feasibility of gas-to-liquids technology for its unconventional-gas production. Like the US, Canada is also seeing a rush of land buying and drilling activity as companies, including Talisman and Chevron, stake out a new shale play in Alberta, called the Duvernay.

The right place for oil’s majors

But Talisman is also a big player in the US, especially in the Marcellus, where it spent more than $1 billion last year to drill wells and add production – although that figure has been scaled back to about $800 million this year. This summer, chief executive John Manzoni told PEU that Talisman has no plans for a similar downstream option in Pennsylvania, but welcomed the return of the majors.

Because of the integrated operating structure of companies such as Shell and BP, Manzoni said the supermajors are ideally positioned to capitalise on abundant supplies of cheap gas feedstocks and convert them into higher-value products. “It’s absolutely the right place for them to be,” he said.

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