When it comes to the recent string of negative headlines for midstream projects facing opposition and delays, Raymond James & Associates Inc. said this week it thinks market fundamentals “and straightforward economics will eventually win out.”
Even so, natural gas pipeline projects in the particularly problematic Northeast will likely continue to encounter “somewhat formidable opposition” that could leave the Marcellus and Utica shales “constrained for the mid-term,” the firm said in a research brief published Monday.
“Frankly, we can’t know for sure how it will play out given the multitude of different issues delaying or causing the cancellation of midstream projects today,” Raymond James wrote. “If it were one consistent hang-up -- issues with the FERC, for example -- then the situation would be clearer.
“However, [Federal Energy Regulatory Commission] regulation is not typically the most difficult issue to navigate, and in many cases, the lack of ‘public convenience and necessity’ isn’t to blame on natural gas projects...Given this context, we don’t feel that the problem set slowing the current slate of projects is a sustainable problem, but instead more of a collection of one-off issues.”
On the crude oil side, Raymond James looked at the recent hangups and public scrutiny for the Dakota Access Pipeline (DAPL) (see Shale Daily, Oct. 20). The firm said it expects market need to win out in this instance as well, with DAPL offering a safer and more economic form of transporting crude out of the Bakken Shale compared to rail cars.
“Looking forward, we see production ramping modestly” in the Bakken “through the next several years (commensurate with our price deck) as takeaway capacity additions materialize, including DAPL in mid-2017...once production is able to ramp, this should push differentials back to around transportation costs (or around $4/bbl from the Bakken to Cushing, OK),” Raymond James wrote.
“...While we do not anticipate the cancellation of DAPL, the resulting lack of takeaway additions...would constrain the Bakken to an extent.” But given “significant rail capacity” differentials should remain “more or less flat without DAPL” until production increases further. “That said, if the absolute price of crude moves higher as we forecast, we could see some widening out of differentials,” the firm said.
On the gas side, Raymond James looked at several Northeast pipeline proposals that illustrate the myriad problems projects face in the region, including Atlantic Sunrise (see Daily GPI, Oct. 20), Constitution Pipeline (see Daily GPI, April 25), Northeast Energy Direct (see Daily GPI, April 21) and Access Northeast (see Daily GPI, Oct. 10).
Raymond James pointed out that, looking at the various obstacles slowing or stalling these projects, “FERC regulation is not typically the most difficult issue to navigate. In fact, most midstreamers are fairly adept” at following FERC’s procedures and meeting the agency’s requirements.
“Regrettably, the Northeast is also mired by other issues” such as “physical constraints due to population density and geological characteristics, intensely critical regulatory and environmental activism...and perhaps the most difficult obstacle, the stubborn regional electricity market structure,” Raymond James wrote.
The firm noted that “there are still plenty of projects coming” to the Northeast “to help narrow differentials to Henry Hub, but each project delay keeps us closer to the status quo (and is a medium-term positive for Henry Hub). We continue to view projects moving natural gas from the western Marcellus/Utica to the Midwest, Gulf Coast and Mid-Atlantic and Southeast as favorable, lower-barrier initiatives.”
Across the major U.S. producing regions the oil basins should have less trouble building out adequate infrastructure. DAPL should eventually get built, and “given Texas’s history as a very hospitable environment for energy projects, we do not anticipate serious issues arising as Permian [Basin] takeaway capacity is added or needed,” according to Raymond James.
Other plays, such as the Denver-Julesburg/Niobrara, the Eagle Ford Shale and the SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties) in Oklahoma, appear to have sufficient pipeline capacity, the firm said.
Moving forward, “asset footprints in key areas for both supply and demand are almost literally irreplaceable, and continue to increase in value as new infrastructure becomes more difficult to construct,” Raymond James said. “...Case in point, the U.S. Northeast has been a major source of [merger and acquisition] activity over the past 12-18 months as larger-scale entities secure their Northeast footprint.
“Only time will tell, but there is certainly value in strong, existing energy infrastructure assets -- especially in the Northeast for natural gas and the Permian and SCOOP/STACK for both oil and gas supplies.”