October 2015, Vol. 242, No. 10


In the News: Phillips 66, Spectra Energy Bail Out Troubled DCP Midstream

Phillips 66 and Spectra Energy, 50/50 joint venture owners in DCP Midstream, LLC, have entered into a nonbinding letter of intent for contributing assets to strengthen DCP Midstream. This transaction is expected to provide DCP Midstream with a stronger balance sheet and increased financial flexibility, and positions DCP to grow through commodity price cycles.

Spectra Energy will contribute its ownership interest in both the Sand Hills and Southern Hills NGL pipelines. Phillips 66 will contribute $1.5 billion in cash, which is expected to be used to pay down a portion of the DCP Midstream revolving credit facility. The transaction, anticipated to close in the fourth quarter of this year, is subject to the parties entering into a definitive agreement and customary consents, including approval by Spectra Energy Partners’ board of directors and regulatory approvals.

The proposed transaction complements efforts at DCP Midstream to reduce operating costs, sell certain non-core assets and convert certain contracts from commodity price sensitive to fee-based.
“DCP Midstream is a valuable portion of our NGL value chain and part of our plans to grow,” said Greg Garland, chairman and CEO of Phillips 66. “This infusion of cash and operating assets by the joint venture owners will enhance the credit profile of DCP Midstream, provide stability to the existing business and allow pursuit of growth opportunities.”

“The contribution of the one-third interests in Sand Hills and Southern Hills will diversify DCP Midstream by enhancing the balance of fee-based assets while building on the re-contracting work already underway,” said Greg Ebel, chairman and CEO of Spectra Energy. He said DCP will “be able to continue providing excellent service to customers and retain its number one position in gas processing and NGL production. This deal also retains the upside for owners as commodities improve.”

Headquartered in Denver, DCP Midstream has strategically located assets in liquids-rich developments and is the largest natural gas processor and the largest natural gas liquids producer in the United States. In addition, DCP Midstream has a midstream master limited partnership, DCP Midstream Partners, LP. The partnership is engaged in all stages of the midstream business.

INGAA Launches America’s Energy Link Campaign

In recognition of the increased level of natural gas pipeline development across the United States, the Interstate Natural Gas Association of America and the INGAA Foundation, its research arm, launched a nationwide campaign to help educate American consumers about the benefits of natural gas and natural gas pipelines.

“America’s Energy Link will provide valuable information about pipelines and natural gas, including materials about safety and the environment,” said INGAA President and CEO Don Santa. “We hope to educate Americans about the tangible benefits natural gas brings to their quality of life every day. America’s Energy Link, also will serve as a springboard for those who want to learn more about natural gas pipelines and be part of the conversation going forward, whether that be with a federal regulator on a specific project or sharing with their local communities, family or friends.”

To learn more about the campaign and access information about natural gas and pipelines, visit ingaa.org/energylink.

Energy Transfer Equity Buying Williams Cos. for $32.6 Billion

Dallas-based midstream giant Energy Transfer Equity is buying pipeline operator The Williams Cos. for approximately $32.61 billion. The companies announced Sept. 28 that the combination creates one of the five biggest energy companies in the world.

Energy Transfer Equity LP will pay $43.50 per share, a 4.6% premium to Williams’ Sept. 25 closing price of $41.60. Williams’ shareholders can choose shares of Energy Transfer Equity affiliate Energy Transfer Corp., cash or a combination of both. The companies put the deal’s value at about $37.7 billion, including debt and other liabilities. Williams’ stockholders will also receive a one-time special dividend of 10 cents per share that will be paid immediately before the acquisition closes.

Williams Cos. previously announced a deal to acquire Williams Partners LP, but that transaction has been terminated. Williams agreed to pay a $428 million termination fee to Williams Partners. Williams will keep its company name and remain headquartered in Tulsa, OK.

Both companies’ boards approved the deal, which is expected to close in the first half of 2016.

Report Warns LNG May Suffer from Gas Glut

A potential boost in natural gas supply from Iran and Egypt may exacerbate a worldwide glut, reshape the global market and threaten U.S. export ambitions, according to Citigroup. LNG export projects from North America to East Africa and Australia be affected as Iran progresses with its supergiant South Pars gas field and after Eni’s discovery of 30 Tcf offshore Egypt, Citigroup analysts said in a report Sept. 2.

The two developments may displace demand for LNG in the Middle East and beyond, possibly deterring future U.S. export projects, according to the bank. “Iran and East Mediterranean, key regions in the next wave of global gas supply beyond the U.S., made major strides in late August,” the bank said. “These developments set the stage for a major boost in gas production and could help remake the global gas landscape.”

Developing an LNG export option for South Pars, as well as the possible boost to Egyptian shipments from Eni’s new field, will add to the excess supply from rising production from the United States, East Africa and the East Mediterranean, the analysts wrote. The oversupply of LNG and drop in prices have also called into question the viability of traditional supply contracts between buyers and sellers, spurring new types of long-term deals with more flexibility on volume, destination and oil-linked pricing, the bank said.

Marcellus Production Hits Record 20.4 Bcf

U.S. natural gas production is expected to slow in September for the first time across the country, as drillers struggle against low commodity prices and oversupply. Even so, states in the Marcellus and Utica shale plays spanning Pennsylvania, West Virginia and Ohio are expected to still produce more gas than they can use and export the fuel out of the region.

“We are anticipating the Northeast will be a net exporter for the average of 2015,” said Anne Swedberg, senior energy analyst for Bentek Energy. “We are already seeing volumes leave the region this summer.”

The rest of the country is expected to catch up later, becoming a net exporter by 2017. Now, most Marcellus gas is going to the Midwest, the Southeast and Canada. Eventually it will have access to Mexico through pipelines and globally through liquefied natural gas exports.

The Marcellus reached record-high production of 20.4 Bcf/d, according to Bentek estimates, “which puts it in line with Texas,” Swedberg said. In 2010, the region produced a total of about 2 Bcf. The Marcellus alone accounted for 21% of the country’s gas production in the first five months of 2015. Meanwhile, a shortage of pipelines continues to plague the area. The spot price in southwestern Pennsylvania was less than half the Henry Hub benchmark price on Aug. 28.

Bayou Companies is embarking on $39 million in upgrades to the pipe-coating facility at the Port of Iberia in Louisiana. The upgrades will provide specialty anticorrosion coating for deepwater pipelines in the Gulf of Mexico.

Construction of the 56,000-square-foot building will begin shortly, said David Taldo, director of operations at the port plant. The facility will be located where Bayou Companies has operated for decades and should be completed in early 2016.

The coating yard at the port has about 300 employees, and the new facility will need more trained workers. Bayou Companies will target out-of-work oil and gas hands who lost their jobs during the downturn.

Imperial Oil Wants to Keep Mackenzie Project Alive

Imperial Oil hopes its long-dormant plan to tap into natural gas fields in the Far North may eventually come to fruition. The lead partner in the Mackenzie Gas Project has written to the National Energy Board seeking a seven-year extension to a sunset clause attached to federal regulatory approval granted in 2011. The clause requires Imperial and its partners to break ground on the project by the end of this year, something unfeasible in today’s market environment.

An updated project schedule would see production begin in 2022 and wrap up in 2026. Other than timing, Senior Vice President Bart Cahir said Imperial doesn’t “envision any material changes” to the multibillion-dollar project, which would carry natural gas from three fields near the coast of the Beaufort Sea down the Mackenzie Valley through a 1,200-km pipeline.

The possibility has arisen of converting the Mackenzie gas into a liquid state, enabling it to be exported by sea as LNG. Imperial and its U.S. parent, ExxonMobil Corp., are considering an LNG project near Prince Rupert, B.C. Imperial’s filing includes letters of support from the Northwest Territories government and aboriginal groups that back the project. As of late 2013, the entire project was expected to cost at least $20 billion.

“It is a precedent-setting project as it is the first in Canada (perhaps globally) where aboriginal people have significant ownership and meaningful participation in a venture of this kind,” wrote Nellie Cournoyea, chair and CEO of the Inuvialuit Regional Corporation. Imperial told the NEB “significant monetary and human resources” have been invested in the project.

“With an extension of the Sunset Clause, this effort will be retained and not be lost. The cost and time required to start over would be a significant deterrent to future development of resources in the Mackenzie Delta and in the Mackenzie Valley,” it said. “The MGP proponents continue to believe that, despite current natural gas market-driven delays, the approved basin-opening project remains in the interest of Northerners and Canadians.”

In June, Imperial and its partners deferred plans to explore for oil in the Beaufort Sea, saying they needed more time to study how to safely drill offshore wells in the harsh Arctic environment. They asked the federal government for a seven-year extension to their license, which expires in 2020.

Ares EIF Group to Acquire Van Hook Gathering System

Ares Management, L.P. announced a fund managed by its Ares EIF Group has a definitive agreement with WPX Energy to acquire the Van Hook Gathering System in North Dakota for $185 million.

The acquisition consists of pipeline systems that gather 11,000 barrels of oil, 6,500 MMcf of natural gas, and 5,000 barrels of water per day from WPX Energy’s Bakken shale oil assets. WPX Energy will continue to operate the gathering system.

Probe into Chinese Line Pipe Exports Welcomed

EVRAZ North America officials said they were pleased by last month’s announcement by the Canada Border Services Agency (CBSA) that it has initiated an investigation into allegations of dumping and subsidization of certain line pipe products from China. EVRAZ is a participant in a complaint recently filed by Canadian line pipe producers.

“The flood of unfairly traded imports into Canada has detrimentally impacted EVRAZ and the North American steel industry as a whole,” said Conrad Winkler, president and CEO of EVRAZ North America. “We are eager to compete with global line pipe manufacturers based on product quality and actual economics. We cannot compete with foreign government subsidies and foreign manufacturers’ dumping practices.”

The Organization for Economic Cooperation and Development (OECD) and the steel industry have estimated there will be nearly 600 million net tons of steel overcapacity globally in 2015, largely the result of foreign government trade-distorting policies and practices.

The Canadian steel industry has invested billions of dollars to create new and innovative steel products for growing domestic oil and gas markets, Winkler said.

“EVRAZ has been producing line pipe in Canada for nearly six decades, and we provide more than 2,300 Canadians with well-paying jobs,” said Winkler. “We continually invest in our operations, as well as research and development, to ensure the quality and safety of our products into the future. We are the only manufacturer able to produce ‘100% made in Canada’ line pipe. However, unfairly traded and subsidized imports challenge this ability.”

Aging Assets, Access to Workforce Hindering Industry

In the survey at the Offshore Europe event, the issues of aging assets and access to talent were jointly ranked first, with 29% of respondents identifying each as their primary concern. Legislation was ranked first by 15% of respondents, due to the increasing complexity of the global regulatory environment.

“Across the world, assets are reaching maturity, access to reservoirs remains challenging and many experienced specialists are nearing retirement,” said Peter Richards, vice president Marketing & Communications for Lloyd’s Register Energy. “On top of that, the ‘digital oil field’ brings an increased need for strong capabilities in mathematics, statistics and data alongside the traditional science and engineering skill sets. This survey reflects those industry dynamics.”

The low oil price environment is forcing many organizations to make difficult decisions in order to achieve cost reductions – and that may prove to be counter-productive in the longer term. John Nicolson of Lloyd’s Register Energy said, “Even as the energy industry braces itself, companies must keep one eye on the future – if the talent pool is diminished (in quality or quantity) the business will be less able to leverage the upturn when it arrives.”

Canadian Energy Pipeline Association Meets

Facing the uncertainty caused by the effects of the prolonged downturn in crude oil prices and the often critical delays caused by regulators and lawmakers, over 125 members and other attendees gathered for the Canadian Energy Pipeline Association (CEPA) Foundation’s fall meeting Regina, SK from Sept. 16-18.

An update of ongoing construction projects and the prospects for future pipeline work was high on the agenda, and attendees were not disappointed by the high level of executives who spoke to them. Among the highlights were several panel discussions centered on the operator’s view of the Canadian pipeline market. Representing their companies were Stephen Clark, senior vice president, Canadian & Eastern U.S. Gas Pipelines, TransCanada; Doug Kelln, president and CEO, TranGas, and Dave Lawson, vice president, Canadian Projects, Enbridge.

Guest speakers included Saskatchewan Premier Brad Wall; provincial Deputy Minister (Economy) Laurie Pushor; Perry Bellegarde, national chief, Assembly of First Nations, Brad Derbyshire, vice president of Operations, Saskatchewan, and Lynco Eagle.

Bill Partington, chief operating officer, Ledcor Pipeline Limited and CEPA Foundation chair, gave the opening remarks. Brenda Kenny, president and CEO, CEPA, and Terrance Kutryk, president and CEO, Alliance Pipeline Ltd. And CEPA board chair, offered industry perspectives. Kent Wilfur, vice president, Project Execution, Spectra Energy Transmission West, updated members on activities by the CEPA Foundation Planning Committee.

Patrick Smyth, vice president, Safety & Engineering, CEPA, gave a report on recent initiatives from the Canadian Pipeline Technology Collaborative.

On the afternoon of Sept. 16, attendees had the opportunity to tour the local facilities of Evraz, NA and Shawcor. Activities also included a golf tournament and a tour of the provincial capital.

The Foundation’s spring meeting will be held April 26-29, 2016 at the Crowne Plaza Fredericton Lord Beaver Hotel.

CEPA represents Canada’s transmission pipeline companies who operate over 115,000 km of pipeline in Canada. Known for their high safety standards, the Canadian pipeline industry had the equivalent of over 13,000 employees in 2013.

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