On March 2, 2015 1:37 pm
The shale oil and gas industry is broken into three sectors: upstream, midstream, and downstream. Upstream is the first stage and involves exploration and production. The midstream stage is associated with the processing, storing, transporting, and marketing of natural gas. The final stage, downstream, is after production through the point of sale.
The recent drop of crude oil prices has affected the US shale oil and gas industry. The most recognized effects have been in the upstream sector, particularly with the producers, where rigs have been laid down and both budgets and jobs have been cut. However, the midstream sector, which alone accounts for a multi-billion dollar industry in the Marcellus and Utica Shale plays in Pennsylvania, Ohio, and West Virginia, has (for the most part) been full speed ahead. This was on display at Hart Energy’s recent Marcellus-Utica Midstream (MUM) Conference and Exhibition in Pittsburgh, PA, and in daily news headlines, including those at Shale Energy Business Briefing.
Marcellus-Utica Midstream Conference and Exhibition
MUM focused on the midstream sector of the Marcellus and Utica Shale plays. “The Marcellus has emerged as a world-class producer. The Utica, for its part, is an impressive contributor to North America’s energy output as well. These two unconventional shale plays, taken together, have done no less than reshape the energy business,” stated Paul Hart, Host, MUM Conference and Exhibition, and Editor-in-Chief, Midstream Business, who added, “Moving the abundant flows of natural gas, gas liquids, and crude to market requires re-plumbing North America’s midstream network. … This conference focuses on how it will happen – even in a price-challenged environment. … Hart Energy’s MUM emphasized that this may be a temporary correction, but meanwhile the Marcellus and Utica regions will continue to grow and have a bright future.”
Sherri Scott, Senior Marketing Manager of Conferences, Hart Energy, relayed, “The 2015 Marcellus-Utica Midstream Conference and Exhibition has been our largest attended midstream event. We are so pleased with the turnout of more than 2,100 attendees–up more than 300 from the 2014 event. The continued support from the industry and the Appalachian region for this conference the last six years has been very exciting. Although we are in a softer market, Hart Energy will continue to provide value to industry professionals and companies who are in need of current and accurate industry data, intel, and contacts.”
Around 160 exhibitors filled the convention center floor—all related to the midstream sector in one way or another. In addition, attendees had the opportunity to listen to conference sessions from over two dozen speakers and moderators on the latest information and key issues affecting midstream development from the crude oil price drop to exports to infrastructure. Here are some highlights from a few of the conference sessions.
Regulatory Spotlight: Regulatory & Policy Update
The “Regulatory Spotlight: Regulatory & Policy Update” session was conducted by John Kneiss, Director, Governmental Affairs, Stratas Advisors, who began with a look at key take-away points for Marcellus Shale production. Projecting “dramatic production growth from 2010 to 2018 with dips and valleys from crude oil price fluctuations,” Kneiss also forecast a “peak around 2020” and “steady output through 2030.” Even after 2030, he indicated, “Significant production declines were unlikely.” With current data, Kneiss estimates the Marcellus Shale to be a 100-year play and the Utica Shale to be an 80-year play.
Speaking of the nation’s natural gas liquids (NGL) export infrastructure getting organized, Kneiss noted, “Of the 600+ infrastructure projects included in our models, we see all purity product exports occurring via pipeline, rail, and marine terminals presently operating or under construction. Pipelines, storage facilities, tank farms, shipbuilders, tanker railcar makers, fractionation plant operators, and de-ethanizer developers will feed those export facilities.” He also added, “The US is now a net exporter of refined products, which was unheard of 10 years ago.”
In addition, Kneiss spoke of both federal and state policy and regulation, noting that on the federal level, Congress is limited in what it can do as the Republican-controlled Congress is impeded by a Senate Democrat filibuster and White House veto threats. However, he added to keep an eye on H.R. 351, which would speed up LNG exports and spoke of the Climate Action Plan, which pertains to emission controls of shale oil and gas wells.
Spotlight: To Market, To Market—Where Will The Production Go
In the “Spotlight: To Market, To Market—Where Will The Production Go?” session, Karen Kabin, Vice President of Business Development, Kinder Morgan Energy Partners, L.P., relayed that the crude oil price drop was good as it allowed the industry, which has seen huge growth in the last four years, “to catch its breath.” She stated, “The Northeast is rapidly becoming saturated with product, resulting in product value degradation. For producers to achieve the best netback, access to multiple consuming markets will be required.”
Access to multiple markets allow for opportunities for expansion. Kinder Morgan Energy Partners, the largest midstream energy company in North America, is investing well over a billion dollars each on midstream projects, such as Utopia East, which will take ethane and an ethane-propane mix from Ohio to Canada; Utopia West, which will transport natural gasoline from Ohio to Canada; and Utica Marcellus Texas Pipeline (UMTP), which will transfer propane, butane, natural gasoline, condensates and/or mixed NGLs from Pennsylvania to the Gulf Coast.
In addition, the Milford, IN, Diluent Rail Terminal provides a “near term solution by utilizing existing infrastructure,” according to Kabin. The terminal is not in use, but could be utilized to move light condensate and natural gasoline (diluent) to Canada. Also, Kabin noted, “Offloading facilities can be expanded as Utica and Marcellus production increases.”
Operator Spotlight: The Marcellus Evolution
In the “Operator Spotlight: The Marcellus Evolution” session, John Mollenkopf, COO, MarkWest Energy Partners, stated, “The evolution of the Northeast shales is a story still being written. The Marcellus and Utica Shale plays are an incredible resource, which is fitting since oil and gas began here.” He sees “great potential in the Marcellus,” especially with gas takeaway projects, reversals, and LNG exports as there are “more than enough NGLs to supply the Northeast.”
One of a handful of small companies that began in the northeast, MarkWest now operates 33 Marcellus and Utica facilities, with two major complexes located in Houston, PA and Majorsville, WV. Plus, MarkWest is constructing 18 new plants in the Northeast. The company saw its largest increase in volume in 2014 with a current processing capacity of 4.1 Bcf/d. MarkWest has invested $7.5 billion in the Northeast, which includes 1,000 miles of pipeline. In addition, its workforce grew by 925 employees in six years, from 476 in 2008 to 1401 in 2014, which was primarily in the Northeast.
Mollenkopf also spoke of some of the challenges in the Northeast and for the industry, including the “extreme engineering” needed in areas like West Virginia, where the ground isn’t flat and therefore creates challenges. For example, the company needed to make a flat spot 900 ft. above a road for one of its facilities.
Concerning the current downward spiral of gasoline prices, Mollenkopf relayed that he didn’t expect to see crude oil prices this low again in his lifetime. Noting that MarkWest’s assets in the Appalachian Basin are still seeing a high degree of profitability, Mollenkopf explained,” This wasn’t a matter of luck.” The company moved to the most economic areas, where wells still get drilled even when producers cut back.
Closing Spotlight: Sailing Ahead
During the “Closing Spotlight: Sailing Ahead” session, Hank Alexander, Vice President, Business Development, Sunoco Logistics, relayed, “More than 800,000 barrels per day of liquids will be flowing out of the Marcellus by 2016,” and noted that with this production growth, the message was to plan, think ahead, and build the infrastructure.
Looking at some of Sunoco Logistics’ NGL pipeline projects, Alexander explained, “Mariner East I has come to fruition after years in the making and is moving propane and ethane from the Marcellus Shale in Western Pennsylvania to the company’s Marcus Hook facility.” According to Alexander, the granddaddy of them all, Mariner East II, will feature 275,000 BPD of capacity for ethane, butane, and propane and will largely parallel Mariner East I. It is expected to be up and running in the fourth quarter of 2016. Combined, Mariner East I and II represent a $3 billion investment and are a local stimulus that provides a comprehensive takeaway solution for transporting Marcellus and Utica liquids to the Marcus Hook Industrial Complex, a world-class Northeast NGL hub, for processing.
The Marcus Hook facility is closer to the Marcellus than its Gulf Coast counterpart. Plus Alexander said there is only a 396-mile difference from the Marcus Hook facility outside Philadelphia compared to the US Gulf Coast (Houston Ship Channel) when shipping NGLs through the Panama Canal to the Far East. The price of moving product from Marcus Hook is minimal, 0.2-0.3 cents per gallon of product.
Alexander also relayed that the Marcus Hook Industrial Complex, a facility that sat idle 15 years ago, has positively affected Philadelphia through resurgence. The complex has utilized a strong labor force and acquired local government support. Noting there is “a lot of opportunity,” he concluded that the export market will be interesting to watch and relayed the importance of being well positioned.
Recent News/Shale Energy Business Briefing
Located at sebb.us, Shale Energy Business Briefing (SEBB) is an ad-free subscription based service, where subscribers receive a daily current events email, seven (7) days/week, 365 days/year. SEBB covers the North American shale oil and gas industry and features hard hitting, concise news, along with a weekly roundup of the top stories and analysis of the big issues.
Here are a few of the top SEBB midstream briefs from the past month.
Falling Commodity Prices Spurring Midstream Mergers and Acquisitions: Fitch Ratings
Falling commodity prices and expectations for slowing growth has begun to loosen midstream assets housed in exploration and production (E&P) companies, Fitch Ratings said Wednesday, Feb 11.
Midstream assets’ valuations have held up well even as prices have fallen. Such asset sales could help provide capital needed to cover funding short falls associated with oil at the $50/Bbl price level.
Fitch expects lower commodity prices may also have an indirect effect on select midstream and master limited partnership (MLP) names, specifically those with direct exposure to commodity prices or names with limited asset and geographic diversity and less robust growth backlogs as upstream names scale back production.
“We expect midstream MLP credit quality will be under pressure as smaller, growth-challenged MLPs try to maintain distribution growth,” Fitch said. “We believe continued pressure will drive commodity- exposed midstream issuers to diversify and scale up operations in an effort to more effectively grow and maintain cash flow stability. Slower production growth will lead to limited opportunities for midstream providers to grow, particularly for names with limited geographic or business line diversity and prompt merger activity.”
The ratings service expects the M&A consolidation trend to accelerate as upstream production contracts and E&P names look to fill funding gaps with asset sales and smaller scale, sub-investment grade midstream names struggle with future growth.
This trend is starting to emerge with recent increased merger activity in the midstream sector. The credit ramifications for midstream names expected to be neutral to positive should prices paid be reasonable and the assets acquired offer operational benefits.
Last month, Kinder Morgan kicked-off midstream acquisitions for 2015, announcing it would buy Hiland Partners for $3 billion including the assumption of roughly $1 billion of Hiland debt from Harold Hamm, CEO, Continental Resources.
Energy Transfer Partners (ETP) soon followed with the announcement of the acquisition of affiliate Regency Energy Partners in a unit-for-unit transaction valued at roughly $18 billion including the assumption RGP debt.
Low commodity prices weighed on RGP’s ability to fund accretive growth, and the transaction provided ETP an opportunity to fund that growth its lower cost of capital and consolidate midstream assets across multiple basins.
Pioneer Natural Resources announced on Feb 4, it’s pursuing the sale of its 50.1% stake in its Eagle Ford Shale Midstream business, EFS Midstream. The asset sale has been rumored to be in the $3 billion range, according to Fitch.
Santa Fe Midstream Forms Partnership with PFE Energy Spectrum Capital
Plano, TX-based Santa Fe Midstream on Wednesday, Feb 11, announced it’s partnering with private equity firm Energy Spectrum Capital, which will initially invest up to $150 million in equity to pursue midstream opportunities across the US.
Santa Fe Midstream’s management team is led by the company’s four founding partners, including Greg Kegin, CEO; Amer Rathore, Founder; Clay Gordon, Vice President-Commercial; and Paul Dolan, Vice President-Engineering.
Prior to Santa Fe’s formation in late 2014, Kegin served as director of Business Development for Chesapeake Midstream/Access Midstream, where he directed such activities as acquisitions, divestitures, joint ventures, and organic growth projects across the US.
Kegin has also served in various executive, commercial and operations roles at ARCO Pipe Line, The Williams Companies, Transok, and Atlas Pipeline.
Rathore is one of four founding partners of Santa Fe Midstream, and he brings to Santa Fe over 30 years of experience in both the power and natural gas industries.
Gordon most recently served as manager of Business Development at Chesapeake Midstream/Access Midstream. He has built, owned and operated three successful midstream companies, and also served in various capacities with Delhi Gas Pipeline and Aquila Energy.
Dolan most recently served as Director of Infrastructure Services for WPX Energy with responsibility for midstream activities in the Lower 48 States.
He supervised the handling of roughly 30,000 barrels of oil per day, 1.2 billion cubic feet of gas per day, and up to 30,000 barrels per day of natural gas liquids. Prior to WPX Mr. Dolan held various management and engineering positions with The Williams Cos, ARCO Oil and Gas, and United Engineers & Constructors.
“We are excited and proud to be associated with Santa Fe as the company pursues its growth strategy in the domestic midstream sector,” said Tom Whitener, a founding partner of Energy Spectrum. “The partnership continues Energy Spectrum’s tradition of backing exceptional management teams which build on their relationships and commercial and operational expertise to become a service provider of choice in the producer community.”
Rose Rock Acquiring SemGroup’s Remaining Crude Oil Assets in $325 Million Deal
Tulsa, OK-based Rose Rock Midstream announced Monday, Feb 9, that it will pay $325 million for the remaining crude oil assets of SemGroup, including the Wattenberg Oil Trunkline System and SemGroup’s 50% interest in the Glass Mountain Pipeline.
The purchase prices includes cash and 1.75 million Rose Rock Midstream common units. The acquirer expects the acquisition to close by April 1.
“We’ve been working toward this agreement for some time now, and we are pleased to have reached this important milestone for both Rose Rock and SemGroup,” said Carlin Conner, CEO of SemGroup, Rose Rock Midstream’s general partner. “The transaction strengthens and diversifies Rose Rock’s asset base while immediately increasing distributable cash flow on a per-unit basis.”
Conner added SemGroup remains committed to drop-down the company’s US natural gas assets to Rose Rock “in the near future.”
The Glass Mountain Pipeline is a 210-mile crude oil pipeline system that comprises two lateral pipelines originating in the Granite Wash and Mississippi Lime Plays. The two pipelines, with a capacity of 140,000 barrels per day (BPD), join and then terminate in Cushing, OK.
The Wattenberg Oil Trunkline System is a 75-mile crude oil pipeline in the DJ Basin, which transports production from Noble Energy to the White Cliffs Pipeline. The Wattenberg Oil Trunkline System includes a 38-mile extension that came online Feb 1.
In other Rose Rock news, the company said Tuesday, Feb 10, it priced 2 million common units at $40.32/common unit.
Rose Rock has granted the offering’s underwriters a 30-day option to purchase up to an additional 300,000 common units.
Rose Rock intends to use the net proceeds from the offering and from any exercise of the underwriters’ option to purchase additional common units to fund a portion of its pending acquisition of SemGroup’s remaining crude oil assets.
RBC Capital Markets, Morgan Stanley, UBS Investment Bank, and Wells Fargo Securities are acting as the joint book-running managers for the offering.
NGL Energy Partners Acquiring Magnum NGLs in $280 Million Deal
Tulsa OK-based logistics company NGL Energy Partners announced Monday, Feb 9, it is acquiring midstreamer Magnum Development from private equity firm Haddington Ventures in a $280 million transaction.
Magnum owns and operates a natural gas liquids storage facility located southwest of Salt Lake City Utah, with multiple existing salt caverns and a potential capacity of greater than 10 million barrels.
NGL said the acquisition will enhance NGL’s existing asset footprint to better support Western US customers, while increasing the partnership’s fee-based revenue stream from current and future contracts on the facility.
The deal is fully-financed and will be paid through a combination of $80 million cash and $200 million in NGL common units.
RBC Capital Markets is serving as the exclusive financial advisor to NGL, while McGrath North Mullin & Kratz and Winston & Strawn are acting as NGL’s legal counsel in the deal.
Simmons & Company International is the exclusive financial advisor to Magnum Development and Haddington Ventures and King & Spalding are serving as Magnum’s legal counsel in the transaction.
Shale Media Group (SMG) is the news, information, and education resource dedicated to the shale oil and gas industries by messaging across video, Internet, publications, events, and radio. For more, check out ShaleMediaGroup.com to access all platforms. In addition, join us on March 19th for our next Elite Energy Event in at the Holiday Inn Express in Bentleyville, PA from 5-8pm. Kristie Kubovic is the Director of Communications at Shale Media Group. Contact her at Kristie@ShaleMediaGroup.com.