U.S. midstream operators should keep their eyes on a long-term view of the markets and less on the current commodity prices because the country will remain one of the biggest natural gas liquids (NGL) suppliers for decades, according to industry experts.
The industry is at a crossroads, said Petral Consulting Co. founder Dan Lippe. He spoke last Tuesday at the 94th Gas Processors Association Conference in San Antonio. The most frequent question he is asked lately is how many midstream-related projects may be canceled in the United States. But it's the wrong question.
"Let's forget about all of the announcements by companies," he said. "Let's talk about the five, six, seven announcements that have been proposed by what we can all agree on are petrochemical companies." Global petrochemical companies have "lots of people, who just like me crunched the hell out of the numbers." They have a clear view of where the future is headed for NGLs.
"They want feedstocks at a good price, and we have got that in spades," the consultant said of the United States. "Zero of the major announcements have been canceled. Nobody has canceled in North America at this point. This is the best pace in the world to build a plant. It's going to be the best place in the world for a long time. $50 crude? Let's not worry about that because it won't always be that."
The midstream industry is one "that does not control its destiny," Lippe said. The industry is "controlled by people who take that crude out of the ground...by people who take natural gas out of the ground and by petrochemical companies...We are controlled by what we do and who we sell our products to and who we have to deal with."
It's not "The Lion King," Lippe said. "This is economics. We are controlled by what happens in crude oil, natural gas and petrochemicals..." Whatever prices are, "we have to deal with it. We can't change it, just understand where we are and do what we have to do...Is gas rich? Is gas lean? How much is there and how much [do we] take out?"
The future is certain, but "the future is always uncertain...What we know today is something we did not know 10 years ago, and what we know today is that we have a lot of resource, a lot of oil and gas...So we will go through cycles depending on the price."
For the next 10 to 20 years, the domestic NGL market will have huge growth prospects, said Lippe. For most of its history, the midstream industry didn't have to think outside the geography of Texas, Louisiana, Kansas, Colorado and Wyoming. "That was our geography. Now we have to think about eastern Ohio, western Pennsylvania, West Virginia, North Dakota...Our geographic scope for what we do fundamentally has changed. It's still mostly coming from the core states, but now we have new playgrounds...That's the supply side..."
For the demand side, the petrochemical industry will remain the No. 1 market -- here and overseas. "The chemical feedstock buyers are our friends," Lippe said. "Without them, we have nobody to go to..." However, the reach is expanding worldwide. The industry "has been very North American-focused for most of our history...We were a self-sufficient island, and we didn't have to export, we didn't have to import. Whatever we produced, we consumed."
That was until around 2010, when Canada began "chewing up" more natural gas to produce oilsands. "We went from very little to export to a lot in two years...No way was that a growth in demand phenomenon; that was displacement of other sources of supply. We took over the Western Hemisphere..." Between 2013 and 2014, the geographic focus shifted again and now the United States is selling more liquids internationally.
Lippe advised the audience to "get acquainted with a lot of new customers" because from this point forward, "we have to be global players." Many of the customers are in Europe, where the United States is "emerging as the most influential supply source" in the northwestern countries. C3 and C4 exports were 70,000-100,000 b/d in 2014, compared with 10,000-15,000 b/d in 2009 to mid-2013.
Supply is not the issue, said Enterprise Products Partners LP's Bill Ordemann, group senior vice president, who participated in the panel discussion. "We have plenty of gas on the shelf" between the Haynesville Marcellus and Fayetteville shales. Now the industry is "waiting on demand," be it from liquefied natural gas exports, Mexico's growing power generation needs or industrial growth. "That's the natural gas story...Even at current prices, a lot of gas wells could be drilled..."
Ethane is "largely the same story" as natural gas. "We think plenty of ethane is available but it needs markets." Some demand is on its way with proposed crackers on the Gulf Coast and "possibly" in Appalachia. "There's a huge market overhang today that is pretty evident. I never thought I'd see ethane at 70 cents/gallon, which is below the gas value most of the time...Possibly half a million galls are being rejected today...There's no production growth but there is production capability...and something needs to be done with it."
Even when the proposed crackers are completed and running, there should still be "plenty" of available ethane, Ordemann said. Meanwhile, propane prices are plummeting even as the United States becomes the world's largest exporter. "The United States has surpassed Saudi Arabia as the world leader" in liquefied petroleum gas exports, and without production growth, the "entire NGL value chain would be at risk."
RBN Energy's Kelly Van Hull told the audience that the U.S. ethane market would "remain overall long with rejection in the Marcellus and Bakken shales through 2020" because of infrastructure and economic constraints.
RBN has put together three scenarios for U.S. ethane markets: growth, cutback and contraction. In all cases, pipeline exports remain consistent. In the growth case, six crackers are built by 2025. Demand goes up, exports expand beyond what is contracted. However, even with six crackers built across the United States, 500,000 b/d of ethane still would be rejected.
In the cutback case, there is only enough ethane available on the Gulf Coast to build four crackers, and no cracker would be built in the Northeast. The contraction case has enough ethane to build only three crackers on the Gulf Coast.
IHS Chemical's Steve Lewandowski, senior director, global olefins, said the issue really centers on the change in petrochemical feedstocks. The "demand for basic chemicals is driven by durable and nondurable goods," and cumulative demand for chemicals is "tremendous" to 2030.
"Investments seek a sustainable advantage," he said. About 60-70% of the cost of chemicals comes from raw materials, whether it's energy consumption or feedstock sources. Technology and scale "enable competitive production costs," but proximity and access to markets also hold advantages.
In North America, operators now are able to leverage low cost natural gas with chemical production, and that leads to "lots of investments," said Lewandowski. Oil prices have cratered, creating a "bit of a pause in thinking" about expanding facilities. However, IHS still expects to see 231 million metric tons of base chemical capacity additions between 2010 and 2020.
According to IHS, the five countries, in order, that are adding the most base chemical capacity additions are China, the United States, Saudi Arabia, South Korea and India. Asia-Pacific growth may slow dramatically, but North America is seen accelerating.
"As the U.S. grows as an exporter, we will need more to make molecules move offshore...That seems to be a concern at this point in time, but it's being worked on."
In North America, "there's been a lot of hype and a lot of growth," Lewandowski said. "But at the end of the day, it's only 25% of the world's demand. We're big, we're spending big, but the rest of the world really impacts what's going on in the United States."
To date, IHS is tracking about 12 million tons of announced infrastructure projects for NGLs. "There's not a lack of players to build here" between "those that have actually announced publicly and a lot of other folks that also are thinking about this."