This is the second part of a special report on the North American oil and gas sector. Read part one here.
Moving crude from the oilsands south to the US is proving to be a difficult issue. In 2008, TransCanada proposed the 1700 mile Keystone XL pipeline that would deliver more than 800 000 bpd of bitumen and heavy crude directly to Texas from Alberta. Due to opposition from environmentalists, states and celebrities, however, any start-up date has been pushed back until at least 2015.
Alternative transportation is being devised. Enbridge, for instance, has committed Cdn$ 15 billion to add more than 1 million bpd of new transportation capacity. It will expand its Mainline System to Chicago, where a new line, Flanagan South, will transport crude to Cushing, OK. From there, a twinning of the 400 000 bpd Seaway line will add an additional throughput of 450 000 bpd to the Gulf Coast. The new 375 000 bpd Sandpiper line will carry light oil from North Dakota and southern Saskatchewan to Chicago. By 2014, Enbridge also expects to have 300 000 bpd moving east to Montreal along upgrades to its existing system.
Producers are also looking to rail to circumvent bottlenecks. MEG Energy plans to move 32 000 bpd of bitumen production by rail to the Gulf Coast. Southern Pacific has announced it is shipping 12 000 bpd from its STP-McKay in situ project near Ft. McMurray. It is estimated that, in 2013, rail will transport 120 000 bpd in Canada and a further 340 000 bpd in the US (unfortunately, the July rail-derailment tragedy in Lac Megantic, Quebec, highlighted the higher risk of rail transport relative to pipelines).
Although recent M&A activity has been much lower than the frenetic pace of 2011, several significant deals were recently closed. Oklahoma-based Chesapeake Energy, in a bid to reduce US$ 14.3 billion in long-term debt, sold the majority of its midstream assets to Global Infrastructure partners (GIP) for US$ 2.7 billion. The assets include gathering and processing systems in the Eagle Ford, Utica, Haynesville and Niobrara shale plays. In addition, the company is also selling South Texas assets for US$ 300 million. When combined with the previous US$ 2 billion sale of midcontinent gathering and processing systems, Chesapeake has sold over US$ 5 billion in midstream holdings. In May, TC Pipelines, a US subsidiary of TransCanada Corp., increased its ownership from 25% to 70% of GTN and Bison Pipeline systems through a US$ 1.05 billion purchase from its parent corporation. The GTN system ships gas from western Canada and the Rocky Mountain region to the US west coast. The Bison network transports gas from the Rocky Mountain region to the US Midwest.
On the federal legislative front, there are few upcoming regulatory reviews that might impact the midstream sector. “Congress reauthorised the Pipeline Safety Act in 2011, and PHMSA (the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration), which is working on new safety initiatives, is expected to release some later this year, so we’ll have a better sense then,” says Don Santa, President of the Interstate Natural Gas Association of America (INGAA). “Otherwise, the legislative front is relatively calm. With the current political climate in Washington, the likelihood of substantive energy legislation is slim. In the upstream end of the energy sector, there have been historic tax benefits to exploration, and changes to those benefits have the potential to change the competitiveness in the marketplace. But when and if Congress implements comprehensive tax reform is a big question.”
That does not mean that the sector is free from challenges, however. In March, a leak in ExxonMobil’s Pegasus pipeline released 5000 - 7000 bbls of Canadian heavy crude in Mayflower, Arkansas. The 848 mile pipeline is used to transport 90 000 bpd crude oil from Illinois to Texas. Thanks to a quick response, ExxonMobil was able to contain most of the crude and prevent it from entering waterways or damaging homes, but the incident was used by critics to emphasise opposition to the Keystone XL.
Concerns over hydraulic fracturing (also known as fracking), have arisen; some of the chemicals used in the procedure could contaminate local drinking supplies, and several jurisdictions have banned it until more is known. If opposition grows and more bans ensue, however, the midstream sector would be adversely impacted as the growth in gas production slows, or reverses.
For several years, the State of Alaska and producers in Prudhoe Bay have been trying to monetise the 32 trillion ft3 of gas trapped on the North Slopes. The latest proposal calls for an 800 mile line that would transport the gas to a port on the state’s southern coast where it would be converted to LNG and shipped to Asian markets. The project is expected to cost up to US$ 65 billion and take six years to build, but competition from other plans to liquefy low-priced shale gas in Canada and the Lower 48 reduces the chances of the project’s success. “The proposed line from Prudhoe Bay to an LNG export terminal has many challenges, including capital cost, lead time and the need to work out a tax regime between the producers and the state of Alaska,” says Santa.
Several traditional, conventional production regions have also seen output declines as operators focus investment and resources on new plays. “Some corridors have seen reduced throughput,” says Santa. “In some cases, however, they can benefit from repurposing their assets.” Enbridge and Energy Transfer Partners, for instance, are converting segments of the latter’s Trunkline Gas system to crude transport. Once completed in 2015, a 30 in. line will deliver up to 660 000 bpd from Patoka, IL, to Louisiana.
Issues surrounding hydraulic fracturing are also being addressed. The White House announced the formation of the Secretary of Energy Advisory Board Subcommittee on Shale Gas Production (SEAB), to ensure that shale gas is produced in an environmentally safe manner. The Environmental Protection Agency (EPA) will examine the full cycle of frack water, from acquisition to mixing and post frack stage (where produced water must be managed and properly disposed). Michigan, Texas, Wyoming and Colorado now require operators to submit plans regarding where they are sourcing fresh water, what chemicals are being used in the frack water, and the volume of water recovered. Industry has been promoting understanding of the practice through education efforts and public announcements. The American Petroleum Institute (API) has established five fracking standards, including well integrity, water management, mitigating surface impacts and environmental protection.
The shift from coal to natural gas as fuel for electricity generation shows promise. Formerly, coal accounted for 49% of all electricity generation in the US, and natural gas stood at 19%, primarily for peakload generation. Now, the EIA notes that both now stand at 32% (the other 36% is nuclear and renewable sources, such as wind, sun and biomass). “The combination of low gas prices and EPA rules that may compel the retirement of older, less efficient coal power plants means that midstream has to move to meet demands,” says Santa. “It’s going to have a big impact.”
In regards to Keystone XL, TransCanada resubmitted a new ROW that avoided ecologically sensitive regions in Nebraska, and the state government subsequently announced that the changes eliminated their concerns. Until the State Department grants approval, however, the project will remain in limbo. Industry observers generally agree that the oil and gas sector must work to improve its social license to operate so that pipeline approvals do not serve as proxies for those opposed to fossil fuel use. Measures include reductions in greenhouse gases (GHGs) during drilling and production, the isolation of GHGs through carbon capture and sequestration (CCS), more comprehensive upkeep of the transportation infrastructure, and better communication between the industry and public.
In the meantime, however, the vast array of new sources and new markets mean good years ahead for the US midstream sector. “I feel optimistic,” says Santa. “There are new opportunities for companies that have assets in regions where production is growing.”
The original article was published in the August 2013 issue of World Pipelines, available for subscribers to download now.
Author Gordon Cope
Read the article online at: https://www.worldpipelines.com/business-news/20082013/north_american_oil_and_gas_pipeline_industry_is_on_a_roll_part_two/