Shale boom fuels build-out

January 9, 2013 By    

An expansion of natural gas liquid (NGL) infrastructure is taking place in the United States today and will continue in the next two to five years, energy analysts say, as producers tap abundant shale plays with improved hydraulic fracturing and drilling technology.

The build-out of processing plants and fractionators, export terminals and pipelines, rail facilities and storage, is the result of growing NGL and crude oil supplies from the country’s energy-rich shale rock formations, such as the Marcellus and Utica in the Northeast, the Eagle Ford in south Texas and the Bakken in parts of North Dakota and Montana.

Bard Black, an energy consultant based in Overland Park, Kan., calls these developments from shale oil and gas resources “a game-changer for the energy industry, with opportunities along the entire value chain. This particular boom in energy production in North America is not like any other we have had previously, from many aspects, and it will provide many benefits to the propane industry for the next few decades.”

Propane is among the NGLs for which producers are drilling and getting the most economical return – joining butane, ethane and natural gasoline. Gas processing plants separate the natural gas, mostly methane, from the NGLs for end-use applications, while fractionators separate the NGLs into their respective purity products. The increased volume of raw-mix NGLs being pulled from shale plays requires a necessary balance in infrastructure to ultimately bring it to market.

“Similar to what is happening in the crude oil and natural gas sectors of the energy industry, the infrastructure to move NGLs will continue to be developed in this decade for the U.S. and Canada,” Black says.

According to the Dallas Business Journal, Houston-based energy investment firm Tudor, Pickering, Holt and Co. expects midstream companies to spend more than $30 billion on new infrastructure by 2015 to accommodate the shift toward NGLs.

Shale shifts dynamics

Shale oil and gas are boosting propane’s domestic supply sources to levels that outpace demand, lowering its price on the world market and transforming the United States into a net exporter of propane for the first time in more than 30 years, energy analyst ICF International reports.

Analysts are forecasting significant growth in shale gas production over the next seven to 10 years. From 2011-22, NGL production will increase from 2.2 million barrels per day to 4.3 million barrels per day, says Kelly Van Hull, an NGL analyst at Bentek Energy. Moreover, propane production from NGLs is expected to grow from 8.9 billion gallons in 2011 to 13.5 billion gallons in 2020, an ICF forecast shows.

“You’re not supposed to use the word ‘explosion’ when you’re in this business,” Van Hull says, “but it is a huge amount of production coming on.”

The Northeast is one region to watch. Historically prone to winter supply shortages due to limited propane production sources and delays by import vessels on the high seas, this region is about to see a tremendous uptick in NGL resources from the Marcellus and Utica shale formations, which traverse parts of Ohio, Pennsylvania, West Virginia and New York.

“Right now you have just under 50,000 barrels [of NGLs] a day coming out of the Northeast,” Van Hull says. “By 2014, you’re looking at over 400,000 barrels a day out of the Northeast. Significant supplies of local propane will be produced in the Northeast to help meet local demand.”

The massive growth in Northeast production will create the “largest displacement of propane supply in the U.S.,” says Bill Gautreaux, president of midstream and logistics player Inergy Services, which has been planning to add 85 million gallons of underground propane storage in New York. “This will require reconfiguration of pipeline systems, expansion of storage, and East Coast propane exports along with large volumes of truck and railcar movements.”

A Bentek Energy map shows about 15 planned gas processing and fractionation sites in Ohio, Pennsylvania and West Virginia through 2014, enough to handle 4.61 billion cubic feet of natural gas per day from processing plants and 453 million barrels of NGLs per day from fractionators.

In addition, 12 natural gas pipeline projects, with total capacity of about 8 billion cubic feet per day and linked to Marcellus and Utica shale resources, were scheduled to come online between 2011-15, according to a supply and infrastructure overview that Black prepared for the New York Propane Gas Association.

In eastern Ohio, where Utica shale resources are vast, companies are spending $7.2 billion to build seven processing plants and four pipeline networks, according to a report in the Akron Beacon Journal. An additional $5 billion in pipeline projects is planned in eastern Ohio in the next few years to upgrade the state’s existing infrastructure to where it can handle the increased volume. In some cases, the lack of suitable infrastructure is slowing shale gas development in the state, the article notes.

With the Marcellus and Utica shale plays essentially serving as a future hydrocarbon hub for the Northeast, additional transportation solutions must come online to move the growing NGL production. New and existing rail facilities are expected to play a bigger role in the next three to five years, a major shift in the region’s supply sources, according to a Propane Gas Association of New England (PGANE) supply study. CHS Inc. recently completed construction of a propane rail terminal in Biddeford, Maine.

“The drill bit has been way ahead of the midstream and downstream sectors of the industry,” Black says. “As the build-out continues in these shale resource plays, the propane industry will continue to see more supply available for certain regions of the U.S. and hopefully the development and refinement of more demand applications from this plentiful domestic supply.”

Another vast oil and gas resource lays in North Dakota, in the Bakken shale formation, an important source of propane for parts of the United States. Since there is little local demand for the new production, these NGLs are flowing south toward two primary propane storage hubs – Conway, Kan., and Mont Belvieu, Texas – and giving rise to the build-out of midstream infrastructure.

“A lot of the Bakken and Eagle Ford propane is finding its way to Mont Belvieu, and the net effect is expansion of pipelines and export capacity, lower local price spreads to Mont Belvieu and supply volumes and economics that are driving petrochemical expansion,” Gautreaux says.

The export equation

Current exports of propane (and butane) are running near capacity of available export terminals, at nearly 3 billion gallons per year, ICF says, leading several companies to invest heavily in export projects that will help balance the U.S. propane supply-demand dynamic.

“As of September, we were producing 724,000 barrels of propane a day out of processing plants and 522,000 barrels a day out of refineries. Those numbers are huge,” Van Hull says. “In order to balance the market by 2014, we’ll have to export 325,000 barrels a day.”

The United States is currently exporting about 115,000 barrels per day, the U.S. Energy Information Administration shows.

Enterprise Products Partners and Targa Resources are two big companies that publicly announced LP gas export terminal projects in the energy-hub hotbed of Texas. This region offers the nation’s most fractionation capacity – Bentek says 14 of 27 fractionation projects across the country are happening in Texas – and the best opportunity to bring these products to market.

“Those are going to remain the big players,” Van Hull says. “They have the existing infrastructure – they are just expanding on it.”

Enterprise saw record activity in 2012 from the Houston Ship Channel, the nation’s largest export terminal, where it was working to expand its propane exporting capability with NGL refrigeration and debottlenecking projects. The company says expansion of its NGL refrigeration export facility would bring total capacity to 7.5 million barrels of propane per month.

The export terminal expansion was one of numerous infrastructure projects (totaling about $3.7 billion of capital investment) that Enterprise referenced in its third-quarter 2012 financial report. The company announced a host of plant and pipeline projects, including the addition of three NGL fractionators at Mont Belvieu, for 2012-13. Enterprise says its system-wide fractionation capacity will exceed 1 million barrels per day in the fourth quarter of this year.

Enterprise is also planning a 1,200-mile pipeline – called the Appalachia-to-Texas (ATEX) Express Pipeline – that will ship ethane from the Marcellus and Utica shale plays to the Gulf Coast petrochemical market beginning in first-quarter 2014.

“These projects are essential to facilitate the expected natural gas, NGL and crude oil production growth in the U.S. from the development of the shale plays,” explains Michael A. Creel, president and CEO of Enterprise, in a press release.

Targa also announced in 2012 its intentions to expand LP gas export capability to more than 5 million barrels per month. The $480 million project will allow the loading of four carrier ships of international grade propane per month starting in the third quarter this year. The project will expand by two to four ships in the third quarter of 2014. The company says it will retain and increase its capability to load HD5 propane and butanes for small and mid-sized vessels.

East Coast activity

Another major propane export project gaining momentum outside the Texas Gulf Coast region involves Sunoco Logistics Partners and MarkWest Energy Partners in Marcus Hook, Pa., fueled by the liquid-rich resources of the Marcellus shale.

Sunoco is investing more than $600 million in infrastructure that will allow propane and ethane shipments on the Mariner East pipeline from MarkWest’s processing and fractionation complex in western Pennsylvania to Marcus Hook, an old refinery near Philadelphia, for processing, storage and distribution to domestic and waterborne markets.

The pipeline will come online in 2014 with propane-only shipments and become fully operational in 2015 with the ability to ship propane and ethane, Sunoco says. However, Marcus Hook has already begun to export propane, with product arriving there by truck and rail.

The other portion of the project, the Mariner West pipeline, will allow ethane shipments from the MarkWest site to Sarnia, Ontario, Canada, for use in the petrochemical market by mid-year, Sunoco says. Both Mariner pipelines will have an initial capacity to transport about 70,000 barrels of NGLs per day.

Midstream players are also wondering whether the same export model as Marcus Hook will work for waterborne facilities in Newington, N.H., and Providence, R.I., where imports have declined significantly because of world economics, according to the PGANE supply study.

Regarding infrastructure further downstream, New England propane marketers should build out more receiving capacity through retail bulk storage. This past year saw progress on projects of 30,000-gallon tanks or larger, and more is needed over the next five years to manage peak winter demands, the study suggests. This will help mitigate the effects of fewer imports and more reliance on potentially unreliable railcar shipments.

In the photo above, propane produced from the Bakken shale formation in North Dakota is offloaded from rail to a CHS transport using transloaders. Courtesy of Westmor Industries


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