Certified gas market integration moves forward with EQT transport deals

EQT announced several natural gas transportation deals late this week in the company's third-quarter earnings call, which suggests how midstream certification to carry environmentally friendly gas could shift the competitive landscape in unexpected ways as the industry navigates the energy transition.

Having recently completed third-party, independent certification of its 4 Bcf/d of Appalachia gas production, EQT has turned its attention to how to monetize this new product.

The market for certified gas remains nascent, with more producers signing on than end-users so far, at least publicly. This dynamic has contributed to low reported premiums in the realm of single-digit cents. S&P Global Platts' Methane Performance Certificates, which launched Oct. 4, settled at 4.4 cents per certificate Oct. 28.

However, EQT's recent transportation deals on Mountain Valley Pipeline and Rockies Express Pipeline suggest that it is possible that selling certified gas can grant producers other benefits, separate from or in addition to any premium pricing.

Similarly, certification could provide midstream operators an opportunity to attractively market available capacity to downstream users who are looking to directly purchase responsibly sourced gas, even if it does not immediately garner them higher rates.

Mountain Valley Pipeline

On Oct. 28, EQT announced an unusual deal to sell 525 MMcf/d of its firm capacity on Mountain Valley Pipeline to an undisclosed investment-grade entity for six years. EQT will deliver and sell certified gas to the buyer, who will assume responsibility for all financial obligations related to the pipeline capacity once it goes into operation.

CFO David Khani told analysts that "this transaction meaningfully reduces our firm transportation costs."

Mountain Valley Pipeline is expected to provide around 2 Bcf/d of firm capacity to bring Appalachia gas to markets in the Mid- and South Atlantic regions. The project is 94% completed, according to the project's website, with an expected in-service date of mid-2022. That said, significant legal and permitting challenges remain, raising concern from analysts that the project might face further delays.

While certification has not been sought out for Mountain Valley Pipeline, the developers announced in July plans to obtain carbon offsets for 90% of emissions associated with operating the project over a 10-year period.

Rockies Express Pipeline

EQT also announced in the third-quarter earnings call Oct. 28 that the company had purchased 205 MMcf/d of Rockies Express capacity, providing a route to move certified gas to the Midwest and Rockies on a pipeline that has also sought out third-party environmental certification.

Tallgrass Energy announced in late September that it had partnered with Denver-based continuous monitoring provider Project Canary to certify the 4.4 Bcf/d, bidirectional Rockies Express Pipeline. As part of the deal, Project Canary will install continuous monitoring sensors on all 22 of REX's compressor stations, as well as certify the pipeline's operations to Canary's Midstream Standard.

In REX's case, certification might have attracted new shippers but did not necessarily increase the bottom line through premiums. Instead, EQT got a discount.

"As part of the agreement, the parties agreed to significantly discount the reservation rates during the first 3.5 years of the contract, which results in a material uplift to price realization and margins during that period," EQT's Khani told analysts Oct. 28.

Even at a discount, the added capacity commitment works to REX's benefit. Some capacity along REX pipeline has remained underutilized following the expiration of legacy contracts over the past two years.

The pipeline's Rockies-to-Midwest capacity has been particularly underutilized, which could be ameliorated if more Rockies producers chose to certify their gas and prefer to move it along a certified pipeline.

Already, Rockies gas producers PureWest, Crestone Peak Resources and Jonah Energy have sought out gas certification in recent years.

Outlook

It is still too early to determine the full value that upstream or midstream certification can bring, whether that value might come in terms of competitive advantage, favorable contract stipulations, or direct premiums.

However, the rapidly expanding energy transition should continue to make certified gas and contracts along certified pipelines that much more attractive as options while the industry tests out paths forward.