New Natural Gas Business Gives Gas Midstream Sector Renaissance

October 2011, Vol. 238 No. 10

Carol Freedenthal, Midstream Editor

Natural gas’ midstream business is seeing a new direction and growth as natural gas from shale reservoirs continues to grow and expand. Usually in the gas business, midstream activities are seen as a part of the downstream – the marketing, distribution and consumption – ends of the business. Now, with so much activity in the areas of gathering, storage, treating and processing, and pipelines at the intra and interstate levels for natural gas and natural gas liquids (NGLs), it is coming into its own.

The driving force for this new activity is the sheer need for new infrastructure and facilities as the locations in the U.S. where natural gas is produced are constantly changing. Because of the new locations where natural gas from shale reservoirs is produced – even though some are in states with high levels of oil and gas production – new pipelines to collect and transport the gas, new plants to treat and process it, and new storage sites are needed.

Many of the shale reservoirs, like the Marcellus in Pennsylvania or the Bakken in Dakota, are in areas previously not known for large hydrocarbons production. Even Texas, with its previous vast oil and gas producing regions, does have a need for new infrastructure because of the locations of these new producing regions.

Much of shale-sourced gas has relatively high amounts of contaminates, especially carbon dioxide, and requires treatment prior to pipeline injection. There are also relatively high amounts of NGLs, like ethane, propane, butanes and natural gasoline, in the gas stream which need to be processed for operational reasons. These and whatever other contaminated liquids that might be in the gas stream need to be removed to meet pipeline requirements for gas quality.

In addition to the necessity for new infrastructure just to gather, treat, process and transport, there is the driving force of economics! Besides the quality requirements to meet pipeline specifications, recent increases in the price of gas liquids have made it attractive to separate and remove them from the gas stream. This is where economics has played a strong role in midstream growth. By separating and selling, either as a mixed stream or individually, ethane, propane, butanes and higher hydrocarbon liquids, additional margins are made on the natural gas produced.

The pipeline construction growth has been for moving both natural gas and the liquids taken out of the gas stream. The need for new intrastate pipelines gained momentum as new fields in locations like Pennsylvania and New York, parts of Texas, Louisiana, the Dakotas, and other locations that might already be near gas-producing areas increased, adding to the activity of the midstream companies.

The opportunities for new gas liquids lines developed because so much of shale-derived gas is “wet” and the liquids had to be removed. Once removed, the problem of getting them to liquids markets necessitated new liquids lines, whether they were to be built or converted from older gas lines.

A good example is the recently completed engineering studies, pipeline routing work and environmental permitting for an NGL project that will expand Crosstex Energy’s Louisiana fractionation facilities and expand access to these facilities and Louisiana product markets through a new NGL pipeline. Estimated cost of the project is $180-220 million.

Another example of the excitement in the midstream arena is the announcement by Enterprise Products Partners, Enbridge Energy Partners, and Anadarko Petroleum of plans to build a 580-mile NGL pipeline from the Texas Panhandle to Mont Belvieu process facilities, the Texas Express Pipeline. Initial capacity will be 280,000 bpd of raw mix, a combination of NGLs for fractionation. The pipeline should be in service by mid 2013, depending on regulatory approval.

Gas processing and treating plants have also seen a rebirth from the new production sources. In the 1990s, there were more than 700 natural gas processing plants, but by 1999 the number had fallen to about 550 plants. According to the Energy Information Administration (EIA), gas plants increased by 12% between 2004-2009. There were 493 gas plants in 2009, according to the latest EIA data available. More have been announced recently and are either in the design or construction phase.

A recent announcement was made by Southern Union Company concerning construction of a $236 million, 200 MMcf/d natural gas processing plant to handle West Texas and southeast New Mexico gas. The gas liquids will go into the recently announced Lone Star NGL’s Permian-to-Mont Belvieu pipeline expansion. Just more growth to the midstream business.

Economics are the other big driver for midstream activities. They might be the most important driver of new growth. Hydrocarbon liquids – whether oil-derived or natural gas-developed – have accelerated in price much more than natural gas itself. Crude oil prices in recent times have passed $100 a barrel. West Texas Intermediate is running just under $90/B today but is at a discounted price compared to Brent pricing in Europe at about $116/B.

NGLs have seen equally attractive prices because of the demand for the liquids as chemical feedstocks, fuel, and gasoline additives. A good example is ethane, now the primary feedstock for ethylene production. A high of over 80 cents a gallon was reached a few months ago and even today ethane is priced at 73.1 cents per gallon. Competing with ethane for ethylene production is naphtha which is produced from crude oil and reflects the high prices paid for crude.

Propane also goes into the feedstock market but has additional markets as a fuel. “Bottled” propane is used in locations where gas-operated equipment is used but natural gas is not readily available. Propane prices are good because they compete with liquid fuels to a degree. Butanes and natural gasoline (pentanes and higher hydrocarbons) are used to upgrade motor fuels and their pricing is dictated more by the crude and finished products markets than by natural gas markets.

As this column was written, propane at Mont Belvieu was 159.5 cents/gal, n-butane was 195.75 cents/gal, i-butane was 212.25 cents/gal, and pentanes plus were 245.25 cents/gal.

Gas liquids at these prices make a very attractive margin enhancer for natural gas sales. Current natural gas prices are around $4/MMBtu, spot price at the Henry Hub. Since the liquids-rich shale-produced natural gas might contain two to four gallons of liquids per 1,000 cubic feet and have a typical chemical composition of 50% ethane, 30% propane and the rest butanes and higher hydrocarbons, this could easily add around $2.55/1,000 cubic feet (for two gallon per thousand gas) to a total for the gas of $6.55/MMBtu! Makes $4 gas worth more than $6/MMBtu, even higher if there are more liquids!

The change in the midstream values have caused some changes in the structure of the ownership of the assets. Early in the game – before natural gas deregulation reached a peak in the early 1990s – most of the midstream facilities were owned by major producers and pipelines. Between deregulation and the changing shape of the industry, more are now owned by separate midstream companies. This includes spinoffs as separate companies from the majors and from the pipelines and includes many Master Limited Partnership (MLP) companies.

No question – the midstream business has come into its own as a vital part of the country’s energy system. With an estimated 80% of U.S. natural gas to be produced needing treating or conditioning, additional growth of midstream companies can be expected.

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