Gas and NGL Infrastructure: Will U.S. Build-out Lead to an Over-Build?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--In a commodity business, timing large infrastructure projects involves faith and luck no less than supply and demand do. Strong gains in supply coupled with a shortfall in infrastructure means products get stranded, like crude oil in Cushing, Oklahoma. Attendees and speakers at a conference on the natural gas liquids (NGL) business here last week had differing views on whether the processing and transportation infrastructure for NGLs, now going through a significant build-out, was in danger of becoming over-built.

In the U.S., the production of natural gas and NGLs, mainly ethane and propane, has surged in recent years, leading companies to announce large investments in gas gathering systems, gas processing and fractionation plants and gas pipeline projects--collectively known as the "mid-stream" stage of the Oil & Gas business. These infrastructure projects, many announced when gas and NGL prices were far higher, are now in advanced stages of development or construction. Many are due to come online in the next 12 months or so.

U.S. gas and NGL prices have fallen by about 50% over the last six to 12 months. Slack consumer demand has led to an anemic economic recovery from the Great Recession. Exporting surplus NGLs and gas seemed to be the answer to an over-supplied domestic market --until overseas economies tanked. For more on the interrelated issues of NGL supply, demand, prices and exports, see July 20, 2012, article --Weak Domestic Market and Shaky Export Market Darken Outlook for U.S. NGL Business.

The U.S. is in a "historic build-out of its NGL infrastructure," Peter Fasullo, principal of En*Vantage Incorporated (Houston, Texas) said at a conference in Denver that was sponsored by EUCI (Denver, Colorado). "The NGL value chain in being expanded and reshaped with long-term implications for producers, mid-stream companies, NGL market centers and NGL end-users."

Fasullo said his clients are starting to ask if the mid-stream infrastructure is being over-built. He said he is starting to wonder the same thing. Gas-processing capacity in the Lower 48 states has risen by about 15.5 billion cubic feet per day (Bcf/d) between 1995 and 2011, and another 12 Bcf/d of capacity is due to come online by 2015, he said. In addition, by 2015, the U.S. will add another 1.26 million barrels per day of NGL fractionation capacity --a sizable increase. Most of this new fractionation capacity is scheduled to be built in Texas or the Marcellus Shale area. Fasullo said he expects the vast majority (as much as 90%) of the fractionation projects will be built. Most are being funded organically by asset owners' free cash flow.

Fasullo noted that U.S. NGL pipeline capacity is being significantly expanded along these major corridors:

• From the Mid-Continent region to Mont Belvieu, Texas, between 543,000 barrels per day (BBL/d) and 660,000 BBL/d of new pipeline projects have been announced.
• From the Rockies to West Texas and on to Conway, Texas, developers have announced pipeline projects totaling 289,000 BBL/d to 415,000 BBL/d.
• From West Texas to the Texas Gulf Coast, between 580,000 BBL/d and 640,000 BBL/d of new pipeline capacity is being planned.

In addition, two NGL terminals at the Mont Belvieu hub are scheduled to be completed over the next 12 months.

"A lot of projects have been announced, and a lot are under construction," observed Anne B. Keller, managing director of Midstream Energy Group, Incorporated (Stafford, Texas). "I'm starting to get a little bearish about the infrastructure build-out."

One fast-growing mid-stream company, MarkWest Energy Partners, LP (NYSE:MWE) (Denver, Colorado), is sharply expanding its presence in the Marcellus and Utica shales. David Loiseau, manager of corporate development, told the EUCI conference that his company will spend $1.1 to $1.5 billion to expand its gas and NGL infrastructure this year. The company is constructing the following projects in or around the Marcellus and Utica shales:

• a 1.8 Bcf/d gas processing plant in the Marcellus
• a 115,000 BBL/d de-ethanization facility in the Marcellus
• a 365 MM cf/d gas-processing complex in the Utica sale
• a 245 MM cf/d processing plant in another location in the Utica shale
• a 100,000 BBL/d NGL fractionation, storage and marketing complex in the Utica shale
• a 150,000 BBL/d processing facility in the Huron/Berea shale

Loiseau said the company's operating income from the Marcellus and Utica shales is scheduled to more than double this year. "We are the largest processor of natural gas in the Marcellus shale, where we have a fully integrated gathering, processing, fractionation, storage and marketing operation," he told attendees. By the end of 2014, MarkWest will operate about 2.5 Bcf/d of gas processing facilities in the Marcellus shale and fractionation capacity of 234,000 BBL/d there.

Loiseau noted that the industry's gas production from the Marcellus has doubled since 2009, to 1 about Bcf/d today, and is expected to hit 2 Bcf/d in early 2014 and 3 Bcf/d in 2017.

Adjacent to the Marcellus shale is the Utica shale, which is "still in its infancy," he continued. Estimations are that the Utica could hold up to 15 trillion cubic feet of gas as well as sizable deposits of NGL-rich gas. Gas production from the Utica is only beginning today. By 2015 it is projected to be producing 1 Bcf/d and by 2020, it should be producing 2 Bcf/d.

Commenting on the U.S. gas and NGL infrastructure build-out, Jesus Davis, Industrial Info's vice president of research for the Oil & Gas industry, said: "On a macro level, a slow-down in the NGL infrastructure build-out makes some sense. Demand is simply not there to support significantly higher levels of production, processing and transportation. However, we have not seen any slowdown in project activity for NGL infrastructure projects. It may happen, but we haven't see evidence of it yet."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, 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.