Gas Midstream Growth Continues As Gas From Shale Plays Increase

December 2011, Vol. 238 No. 12

Carol Freedenthal, Midstream Editor

Midstream goes mainstream in the natural gas business as midstream activities continue to take the spotlight. New gathering systems and intrastate pipelines along with additional gas treating, processing, and fractionating plants are announced frequently.

Additional gas liquids storage and transportation systems are part of the new capital ventures.  Driving the new projects is the expanded development of the various shale-based resource centers, especially developments having high liquids content natural gas or crude oil itself. 

Liquids are hot! Crude in the U.S. is running in the mid $90/B range compared to more than $115/B in Europe. Natural gas liquids – ethane, propane, the butanes and natural gasoline are also seeing elevated prices. Early November Mont Belvieu, TX ethane prices were 91.6 cents/gal, propane was 144.3 cents/gal, n-butane was 182.3 cents/gal, i-butane was 229.5 cents/gal and natural gasoline was 230.3 cents/gal. Though natural gas prices remain low – around $3.40/MMBtu – the added value from liquids is keeping the market hot.

Shale reservoirs seeing additional interest and rapid expansion are in Texas, Eagle Ford; in Texas and Louisiana, Haynesville; in the Northeast, Pennsylvania, New York, and Ohio, the Marcellus; the north-central including the Dakotas, the Bakken; in the mid-central, including Wyoming, Colorado, and Nebraska, the Niobrara.

A decade or so ago, midstream activities took a back seat to the upstream, exploration and drilling activities and downstream, marketing developments. Midstream activities, in addition to the transportation and storage functions, consisted of gas treating and processing. This previously was done to meet pipelines standards for transporting natural gas from wellhead to burnertip.

Treating was mainly to remove contaminants from the gas stream such as carbon dioxide, hydrogen sulfide, nitrogen, and water. In some locations, the inert gases such as helium were also removed. Processing was done to take out the natural gas liquids which are higher carbon molecules such as ethane, propane, butanes, and natural gasoline (pentanes and higher). 

Natural gas production from wet gas sources can carry anywhere up to two to four gallons of liquids per thousand cubic feet of gas. Typically, the extracted liquids have 50% or more of ethane which could interfere with pipeline gas transmission.

Now, with the development of natural gas in new locations and the increased economic demand for gas liquids, midstream is growing in importance. A decade or two ago, the ethane price was in the 20 cents/gal range and if it fell below that, the ethane was re-injected back into the natural gas stream! 

In today’s markets, the added value from the gas liquids can easily add $2-4 to the value of a thousand cubic feet of natural gas. Though liquids’ prices are much higher than in previous years, they are still a better economic value for chemical manufacturing raw materials, transportation fuel components, or as fuel as propane and butanes are used. The only other sources for these hydrocarbons are by-products from refineries, and with crude prices here and even higher in Europe, gas liquids from natural gas have the economic advantage.

The pace is hot right now but the growth has been slow in materializing in recent years. There was some growth in operating capacity in 2010. Between 2004-2009 – not including the processing capacity in Alaska – there was about a 12% increase in operating capacity. During this period (and not including Alaska), average plant capacity increased from 114 MMcf/d to 139 MMcf/d. Actual number of plants decreased about 8%, not including Alaskan facilities.

Now, 2011 is seeing the surge in gas processing facilities and systems. The Eagle Ford in Texas is seeing about a 2 Bcf/d increase in systems and processing plants. The Marcellus – Ohio, New York and Pennsylvania – an area where large-scale oil and gas production is new – many new gas processing plants are being seen as well as pipelines for moving the natural gas liquids to markets and necessary storage facilities.

In the U.S. there are 493 operational natural gas processing plants, according to the Energy Information Administration (EIA). They are in 22 states with Texas having the largest number, about 26% of capacity.  The single biggest owner of plants by number is DCP Midstream Inc., with 48 facilities. Enterprise is next with 23 and Enbridge is third with 18. BP has the largest throughput of gas capacity ahead of DCP, mainly because of its large plant in Alaska, the biggest in the country.

According to an EIA study released in June 2011, as of 2010 there were 12 plants with operating capacity greater than 1 Bcf/d.  Louisiana has six. The largest gas processing plant is in Alaska with an operating capacity of 8.5 Bcf/d. Of the approximately 23 Tcf of natural gas marketed in the U.S. in 2009, 15.9 Tcf were processed, producing 721 million barrels of liquids. The extraction loss – the amount of natural gas used as fuel and shrinkage in the gas volume from extracting the liquids – was 1.02 Tcf.

Some of the processing plants not only removed the gas liquids from the natural gas stream but also separated (fractionated) the individual components into separate streams. Where a processing plant produces only a mixture of liquids – called a raw mix – this is then shipped to a separate facility to be divided into individual products for marketing.  A good portion of the new construction is fractionation plants for product separation.

With all the changes in production locations and market demands, the structure of the midstream industry has changed again. In the early 1980s, just after the Natural Gas Policy Act of 1979 was passed, the industry went through a metamorphosis when natural gas pipelines became transporters only. In this recent transformation, more and more companies such as producers, pipelines, and marketers have set up separate midstream companies.

In creating these companies, the trend is to make the midstream a more diversified, all-encompassing operator. The midstream company of today might include gathering and transporting pipelines, processing facilities and even storage for liquids and natural gas. The producer today might contract with only one company for the moving of gas from the wellhead to the burnertip and cover liquids’ extraction, transportation, etc.

The major companies today in the midstream sector are big operators like DCP Midstream Inc., BP PLC, Targa Resources, Gulfterra Energy Partners LP, Enterprise Product Partners LP, and Devon Gas Services. Many of the producers and long-haul pipelines have set up separate companies to handle the midstream activities.

In making these divestments, many of the companies were set up as master limited partnerships (MLP). Of the top operators more than half are MLPs. Started in the early 1980s by an exploration company, the MLP allows smaller investors to enter the oil and gas industry. Midstream operations, with their fairly even cash flow, make ideal companies for financing with an MLP. The financial advantage is that the MLP itself pays no income taxes and even the partners in the MLP can see significant tax advantage on income.

Today, a common element in contracts for natural gas transportation and processing by the midstream companies is a “produce or pay” clause. Much like the old “take or pay” clauses in the days when the natural gas pipelines were the major cog in the natural gas business, these clauses ensure a steady income and guarantee for the capital invested.

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