Strong North American Project Spending for Gas Infrastructure Expected to Continue

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. natural gas producers have struggled to operate profitably in a low-price environment. That doesn't look likely to change any time soon. But those low prices, along with incredible efficiency gains, have shifted investment to short-cycle unconventional shales. Recovering prices and OPEC cuts have increased unconventional upstream production investment 50% this year. This is leading to strong growth in investments for domestic infrastructure projects like gas-processing facilities and gas pipelines, Shane Mullins, Industrial Info's vice president of product development for energy markets, told about 500 attendees at Industrial Info's 2018 Industrial Market Outlook event held October 12 in Baton Rouge, Louisiana.

The natural gas shale boom in the U.S. has brought about dramatically reduced energy prices, which have been painful for producers," he said. "But the industry has emerged with incredible efficiency gains and it is well positioned to take advantage of recovering prices and production declines taking place outside the region."

Those production declines in non-U.S. regions have led to increased demand for U.S. natural gas, delivered by pipeline to Mexico, as well as liquefied natural gas (LNG) tankers to countries that are not physically connected to the U.S., he added. Declining gas production from other countries has helped boost investments in U.S. gas infrastructure.

Although producers may not reap big benefits from surging demand for U.S. gas, Mullins identified several strategic trends driving up demand and leading to increased investments in the facilities that process and transport the gas from where it is extracted to the places it will be used. The main demand drivers are:

• Growing liquefied natural gas (LNG) exports
• Rising exports to Mexico and Canada
• Increasing Power sector demand
• Mounting demand from Petrochemical companies, and
• A supportive Trump administration

Responding to those trends, production of natural gas from domestic onshore fields is expected to rise sharply in the coming years, Mullins said.

Click on the image at right for a graph showing expected growth in production of gas from domestic fields through 2020.

"Prices for natural gas liquids (NGL) have risen faster than crude-oil prices," he noted. "As well, there has been exceptional drilling permit growth, higher productivity per new well drilled and an increase in rig counts." For more on the broad national trends driving industrial project spending, see October 23, 2017, article -- North American Power Development: The Pause Before the Surge.

Over a 12-month period between early 2015 and early 2016, Mullins noted, the number of onshore rigs drilling for gas fell about 75%, from just under 2,000 to about 450. Yet production from onshore gas wells held steady at nearly 80 billion cubic feet per day (Bcf/d).

However, since this time last year, the industry has turned a corner as producers ramped up drilling programs. Unconventional play rig counts were up 87% this week over the same period last year.

Increased global demand for natural gas liquids (NGL) has led to the construction of several liquefied petroleum gas (LPG) export facilities, and a sharp rise in U.S. LPG exports, Mullins continued, adding: "The shale gas revolution continues to increase propane and butane production, and with LPG export volumes no longer constrained by terminal capacity, the Panama Canal expansion and 29 additional VLGC [very large gas carrier] ships now available this year, the U.S. is the largest exporting country. We should see LPG exports rise by another 400,000 BBL/d [barrels per day] by 2019 to meet demand mainly from China, our largest importer, with more than a dozen world-scale PDH [propane dehydrogenation] plants that have come online; Asia's naphtha-based ethylene crackers will be catching up to Europe's, which now uses 40% LPG in their feedstocks. Japan, South Korea, Taiwan and Singapore will continue to rely more heavily on U.S. supplies over the Middle East. Indonesia's kerosene-to-LPG program will only add additional demand to that."

Propane and butane prices are now tied to international markets, which have risen to a point where ethylene crackers in the U.S. will be leaning on ethane as the primary feedstock, which is currently priced too low to recover at many gas-processing plants.

Strong demand for ethane is finally coming. Ethane exports will grow from 190,000 BBL/d to 270,000 BBL/d by late 2018, and will likely stay at that level, but there's another 400,000-500,000 BBL/d of new ethane demand coming from a wave of new ethylene cracker capacity starting up by mid-2018. This will positively impact gas processing plants, which have been in ethane-rejection mode since 2013.

Along with methane, ethane is an NGL commodity which can be sold as natural gas, at a time when ethane prices "are dirt cheap," Mullins said. The industry will see gas plants in the Southwest swing into full ethane recovery mode over the next year, increasing NGL production from 3.6 million BBL/d to 4 million BBL/d. Re-mix NGL pipeline capacity will be constrained by 2020, and this has led to more than $4 billion in newly announced Southwest NGL pipeline projects by Enterprise Products Partners LP (NYSE:EPD) (Houston, Texas) , Targa Resources Corporation (NYSE:TRGP) (Houston, DCP Midstream LP (NYSE:DCP) (Houston) and Buckeye Partners LP (NYSE:BPL) (Houston, Texas).

The gas processing sector took a huge hit in 2015 with lower NGL prices and the result has been lower in-plant capital expenditures. Margins are returning, along with utilization rates, and Industrial Info expects to see new projects come about, as many operators will be preparing for maximize ethane recovery at existing plants.

Click on the images at right to see scheduled growth in U.S. LPG processing capacity and U.S. ethane cracker capacity.

Mullins told attendees at the Baton Rouge briefing that "As far as new construction for 2018, we are tracking 39 Trains, 5.4 Bcf/d [billion cubic feet per day] under development, or $4 billion. Growth in associated gas production in the Permian, SCOOP and STACK will remain the primary driver for new gas plant construction."

In terms of commercial start-up dates, Mullins said about 3.9 Bcf/d of new gas-processing capacity came online in 2016, but this year, another 6.1 Bcf/d of new processing capacity is slated to come online. Next year, as much as 8.4 Bcf/d of gas-processing capacity is expected to begin operating.

Project spending on U.S. gas-processing facilities is expected to reach about $7 billion in 2017, an increase of about 250% over the $2 billion that companies spent building new facilities last year, the Industrial Info product developer said.

Of course, once gas is processed, it must be put into a pipeline for the journey to its point of use. Here again, Mullins detailed the ongoing buildout of the U.S. gas infrastructure. A growing number of pipelines are scheduled to bring gas from other regions to the Gulf Coast market, which includes counties in Texas, Louisiana and Mississippi.

This year, pipeline construction activity is up 142% at $13.1 billion, and 3,300 miles of new pipe reaching construction kickoff. Now with the Federal Energy Regulatory Commission (FERC) regaining quorum, pipeline projects which have sat idle can expect to see approvals forthcoming, Mullins said. This has already started with the $500 million NEXUS pipeline project. Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta), Eastern Shore Natural Gas (the interstate natural gas pipeline subsidiary of Chesapeake Utilities Corporation (NYSE: CPK) (Dover, Delaware) and Kinder Morgan Incorporated (NYSE:KMI) (Houston) have recently written letters to FERC requesting approvals for their prospective projects by December 2017 so construction can begin in early 2018. Industrial Info expects to see more than 3,800 miles worth at least $10 billion in new construction starts in 2018.

Some of those proposed pipeline projects are designed to bring gas to the Gulf Coast area from the Marcellus, Utica and Haynesville shales, the Permian Basin and the Mid-Continent region.

Looking more broadly at the Oil & Gas Industry's expected spending on infrastructure projects across the U.S. and Canada, Mullins said there were about 600 projects actively being developed that are slated to begin construction, ranging from crude oil storage to compressor stations. The total investment value of those projects is about $150 billion. Of that sum, Mullins said about $47 billion were expected to move forward. "If this isn't the Golden Age of gas infrastructure project spending, it's pretty close," he concluded.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.