The Challenges of Pipeline Construction at the Marcellus ShaleMarch 4, 2013
One of the most important plays in the US Oil & Gas industry is the Marcellus Shale Formation. This expansive formation is estimated to contain the second-largest supply of natural gas in the world. It is also sitting right on top of a very energy-hungry market. As such, it seems obvious that tapping into this rich source of natural gas is one of the main objectives of the oil industry. However, before the Marcellus Shale Formation can reach its full production potential, it must first build up an infrastructure of pipelines to transport the natural gas once it has been recovered. Unfortunately, there are several challenges facing pipeline construction in the Marcellus region that must be overcome.
Insufficient InfrastructureThe current network of pipelines in the Marcellus Shale region is currently insufficient to handle the full production potential that the area actually contains. More pipelines need to be added before production can completely ramp up otherwise, the infrastructure would be overwhelmed. Part of the reason for this delay in pipeline production is due to the fact that initially, the Marcellus formation’s abundance of natural gas was significantly underestimated. In addition advances in drilling technology, especially in the areas of horizontal drilling and hydraulic fracturing, have resulted in much better output for new wells. While the old, small infrastructure of pipelines may have been able to handle a low number of wells with limited production, they are not able to handle the greatly increased number of wells, especially with higher production.
Gaining Right of WayOne of the biggest challenges in pipeline construction is simply gaining the right of way or easement to use a section of a landowner’s land for the pipeline. Interstate pipelines that transport oil and gas between states are generally covered by eminent domain, which means that the landowners cannot stop the pipelines from being built. However, the infrastructure within the state itself connecting various wells or gathering the natural gas to the main lines is not covered by eminent domain. Therefore the pipeline operator must make individual agreements and gain the right of way with every landowner along the route. There can be a very high cost associated with gaining the right of way, and it will vary considerably depending on the specific location of the land. In rural areas, it might be relatively inexpensive such as a few dollars per foot of pipe. However, in urban areas, it could get much more expensive and might even go as high as $100 per foot. There may also be signing bonuses given to the landowners. All of this is before the actual cost of construction and maintenance for the pipeline itself. Besides the cost of paying for the right of way itself, there is also often quite a bit of negotiation that goes into the process. There is also the chance that a landowner might refuse to grant the right of way at all, or there could be a breakdown in negotiations between the pipeline operator and the landowner resulting in the deal falling through.
RegulationsAnother challenge to pipeline construction is the heavy regulation that goes along with the process. The Federal Energy Regulatory Commission (FERC) regulates many aspects of interstate pipelines. They can even determine the route used and the maximum allowable price rates. Generally, the FERC bases decisions about the construction of the pipelines on the environmental and ecological impact the pipeline would have, while decisions about price rates tend to relate more to the welfare of consumers and other economic factors. Other federal departments that often have an impact on pipeline regulation include:
- The U.S. Department of Transportation (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) - DOT and PHMSA oversee regulations relating to the safety of natural gas pipelines.
- The U.S. Department of Interior Minerals Management Service (MMS) - The MMS regulates leases for the offshore pipeline easement.
- The U.S. Occupational Safety and Health Administration (OSHA) - OSHA makes regulations based on worker safety and general working conditions.
- The U.S. Environmental Protection Agency (EPA) - The EPA, in conjunction with state environmental protection agencies regulate the construction and operation of pipelines as they relate to environmental issues.
- National Environmental Policy Act of 1969
- Federal Water Pollution Control Act (“Clean Water Act”)
- Coastal Zone Management Act
- Endangered Species Act
- Clean Air Act
- National Historic Preservation Act
- The Pipeline Safety Improvement Act of 2002
- The Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006