The US is in the initial phase of a roughly three-year “pause” in midstream pipeline additions, linked to the price decrease for both crude oil and natural gas liquids, and the subsequent drop in NGL production/availability, a pair of midstream experts said Friday, March 6.
Speaking during the Internet webinar “US Midstream at a Crossroad,” Dan Lippe, President and Founder, Lippe Consulting, and Lesa Adair, CEO, Muse Stancil, agreed the breakneck construction of midstream lines witnessed during the 2011-2014 period will slow looking forward.
“We are at the beginning of a pause for midstream pipeline additions due to lower crude oil and natural gas liquids production, and the subsequent availability of NGLs,” Lippe said.
“I would agree there will be a pause in construction of big artery infrastructure pipeline systems, but there still will be build-out of gathering systems,” according to Adair.
The webinar was sponsored by Leidos Engineering and presented by Oil & Gas Journal.
The speed with which the midstream industry has added pipelines and facilities to keep up with production has been phenomenal, the participants believe.
Lippe said within the last three to five years, raw mix pipeline capacity has been increased by 1.1 million barrels per day (MMBPD), while raw mix fractionation capacity has been increased by 1.9 MMBPD, and the capacity of liquefied petroleum gas (LPG) and ethane export terminals also has risen by 1.1 MMBPD.
“The other way the midstream industry has dealt with the NGL supply surge is through the move to take or pay contracts,” according to Lippe. “These contracts shift the commodity price risk to producers, independent gas processors and international LPG buyers.”
Adair agreed with Lippe on the move to take or pay pacts, adding other changes in contract trends in the recent past include the move to longer contracts of five, 10, 20 years, or even for the life of the lease.
“Contracts also are growing more and more complex and customized, with a greater number of specific fees,” Adair said.
Length of contract and complexity of pacts can limit or complicate renegotiations, the Muse Stancil CEO said, while the use of take or pay contracts can have financial implications for midstreamers leveraged by financial sustainability.
Lippe added the growth in the availability of ethane has “sparked the largest ethylene capacity building boom in the history of the US chemical industry.”
Low prices and less product can be a good thing for midstreamers, according to Adair. Such situations can lead to efforts at cost reduction and the retirement of debt, to divestments of assets and acquisitions, to asset spinoffs and consolidations.
“Low prices and less product can lead to joint ventures and the outsourcing of various services,” according to Adair.
Both consultants agreed, midstreamers today must look past what’s happening in the shale oil and gas industry domestically and, instead, need to look at world markets.
“In the past, [product] surpluses were generally eaten up in six to 12 months by tweaking North American markets,” according to Lippe. “Today, there is so much surplus that midstreamers must learn the international rules of business and contend with such things as [foreign] freight rates and terminal fees.”
“The overall price environment and the balance between supply and demand today are driven by world economic growth,” Adair said, who believes LPG and condensate export volumes will continue to grow.
“Midstream must transition from being risk-averse back to risk-sharing,” according to Adair.
Questioned by the webinar audience on the viability and possibility of one or more companies acting upon plans to build an ethane cracker in the Marcellus Shale play, and gas-to-liquids facilities in the Utica Shale play of eastern Ohio, Adair said the projects remain viable.
“Most people believe there will be a cracker built in the Marcellus; there is good downstream infrastructure [to get ethylene to users], and good infrastructure overall, plus the ethane [to be processed into ethylene] will be there,” according to Adair.
Looking at GTL construction, Adair said over the last few years, the scope and focus of projects, even the methods of conversion have changed, but project viability remains.
“What really needs to happen is that we get a couple of these GTL projects built,” she said.
Article from Shale Energy Business Briefing’s daily newsletter.
The publication boasts concise, 400 words or less news briefings, sent directly to your inbox 365 days per year. SEBB’s motto is simple: “No Ads. Just News.” For a limited time, the publication is offering a 14 day, risk free trial to new subscribers.
Also, sign up now and receive 10% off your subscription for life, with the coupon SD10Discount.