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ANALYSIS: Mountain Valley Pipeline's once-favorable gas economics fall amid completion hurdles

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ANALYSIS: Mountain Valley Pipeline's once-favorable gas economics fall amid completion hurdles

Highlights

Value proposition shifts after seven years

Rising costs helped force ACP cancellation

Houston — As EQM Midstream Partners tries to overcome legal and regulatory hurdles that have so far prevented it from completing its Mountain Valley Pipeline, a further delay or cancellation of the project could impact US Northeast gas flows and prices after Dominion Energy scrapped the Atlantic Coast Pipeline in 2020, S&P Global Platts Analytics data show.

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Despite demand from downstream customers in the mid-Atlantic and Southeast, new pipelines that would connect those markets with abundant supplies of Appalachian Basin gas have struggled to get built due largely to permitting challenges, pressure from environmental groups and shifting economics.

A group of Republican lawmakers is pushing legislation that would speed up permitting and reduce costs of new US energy infrastructure, but the prospects are uncertain under the Biden administration and Democratic-led Congress. Dominion cancelled the $8 billion ACP last July, citing legal hurdles and ballooning costs.

While the 303-mile, 2 Bcf/d Mountain Valley Pipeline could feasibly argue that its value proposition has only grown in the wake of the Atlantic Coast Pipeline cancellation, the project's once-favorable economics have been diluted by a combination of rising costs and narrowing spreads.

When it was initially filed, Mountain Valley proposed a maximum interruptible rate of about $0.97 per dekatherm -- the equivalent of the all-in cost for firm transportation, including reservation and variable charges.

But at that time the project was estimated to cost roughly $3.25 billion. Substantial delays and permitting challenges have caused cost estimates to balloon to as high as $6 billion, indicating that all-in costs to ship on Mountain Valley, when it does come online, could be nearly double the rate assumptions underpinning the early project prospectus.

And while the costs to ship on the project have grown, the spreads the pipeline is designed to capture—between Dominion South on the upstream end and Transco Zone 5 downstream—have come under heavy pressure as earlier demand-growth forecasts for the mid-Atlantic region have failed to fully materialize, Platts Analytics data show.

In 2014, when Mountain Valley was initially offered at open season, spreads between Dominion and Zone 5 for calendar year 2022 were trading at nearly $1.50/MMBtu, well above the roughly $1 it would cost to ship on Mountain Valley.

But now, nearly seven years later, that spread has collapsed to only around $1/MMBtu, while costs have risen. Even if the project's costs remained flat over the last seven years, the spread would still generally be out of the money.

In February, in an effort to get the project back on track amid long-running legal battles over its water crossing authorizations , Mountain Valley Pipeline pitched a new, amended application at the Federal Energy Regulatory Commission, even as environmental groups launched new efforts to encourage divestment from the project. The operator a sked FERC to approve the application by June 17, citing the prior record of delays experienced by the project, including those driven by litigation.

Court maneuvers

MVP, separately, scored a recent legal victory when the DC Circuit Court of Appeals denied a request for stay from the Sierra Club in regard to FERC orders allowing construction in certain areas. That decision, however, did not change the project's status quo, or allow work in areas currently lacking authorization, such as waterbody crossings and areas traversing the Jefferson National Forest.

MVP has also proposed an expansion, called MVP Southgate. The expansion w ould extend from southern Virginia for another 70 miles to new delivery points in North Carolina and service customers of utility PSNC Energy with Appalachian natural gas .

North Carolina regulators will have to reconsider their denial of water permits for MVP Southgate and better explain their decision, a federal appeals court said March 11.