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Demand Is Light at End of Pipe For Troubled Midstream

Pain at the wellhead has flowed down the pipeline to afflict midstream infrastructure operators, and about the only bright spot right now is the outlook for growing natural gas demand at home and abroad as well as increasing liquids exports, a trio of speakers said at IHS CERAWeek.

"I don't have a clue how low crude oil is going to go, how long it's going to stay there or what it's going to look like when we find some stability," said Enterprise Products Partners CEO Jim Teague. Natural gas is oversupplied in the midst of a very warm winter, and natural gas liquids prices are floundering, he said. "At some point we're going to come out of this," Teague said. "People keep calling it a cycle. I call it pure hell.

"We firmly believe that price creates supply and price creates demand." However, with the U.S. oversupplied in hydrocarbons, exports are necessary. "We've learned from our LPG export business that other countries want U.S. resources," Teague said at the conference in Houston. Benefits of U.S. commodity and products relative to those from elsewhere in the world are price transparency and reliability of supply, he said.

Spectra Energy Corp. CEO Greg Ebel said that while things look dismal in the upstream for now, the demand end of the natural gas pipe is booming.

Growing demand for natural gas is underpinned by power generation, petrochemicals and emerging exports of liquefied natural gas. Pipeline projects used to be supply push; now they're demand pull. "I'm extremely bullish on the demand side for natural gas," Ebel said. "We've been building pipelines at breakneck pace...About 80% of everything we're doing at Spectra is on the demand pull side, and the average contract term is about 19 years long..."

Gas demand increases are not so much from incremental growth but rather from conversions from fuel oil and coal, as well as retiring nuclear power plants, Ebel said. "The changes are going full tilt on the demand side," he said. "It's really hard for me to see that change stopping, and that change is going to continue to need infrastructure."

The picture is a bit different on the crude oil side. Plains All American Pipeline CEO Greg Armstrong said crude pipeline capacity exceeds near-term needs for just about every shale basin, with exceptions being in Canada and the need for some "inter-regional plumbing" in some places.

Competition for the marginal barrel has increased, he said, and transportation capacity is being discounted in the secondary market. The shale liquids boom spawned an oil pipeline buildout phase the likes of which hadn't been seen in 50 or 60 years. Increases in transportation capacity took the form of existing system expansions, system conversions and construction of new pipelines.

New pipelines were typically underpinned by volumetric commitments that often represented "materially less" than the overall project capacity, Armstrong said. Some of the commitments were based upon expectations of production growth. And these commitments were made on pipelines that had the highest tariffs, he said.

"We believe the massive pipeline infrastructure expansion in crude oil is over for a while...and some of the incremental expenditures can actually be avoided through consolidation and rationalization."

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