Takeaway is what the midstream sector is all about. Getting the crude oil, natural gas, and natural gas liquids away from the wellheads and on their way to the processing plants. Sounds simple, but it’s a world unto itself, and it’s a world that’s undergoing dramatic change.
by Jesse Mullins
The upstream sector has its adventurous pioneering mystique, and the downstream sector has its hustling, bustling, industrial swagger and arcane science, but the midstream sector, at least until recent times, evokes images of a simply go-along enterprise. It connects the Up to the Down. Job done. But that’s changing. Not the connecting part, of course, but the go-along part. Midstream, in the Basin at least, is getting itself into more conversations, and into more deliberations, and into more matters of consequence. Plus, the sector itself is just getting more sophisticated and ambitious and innovative. And big. And collaborative. It’s becoming a place where, increasingly, the action is.
On the fortunes of midstream ride the fortunes of the oil industry on the whole, because if the Basin is to forge ahead into the heady role of world swing producer, of exporter par excellance, then it will be because midstream came riding to the rescue and got all this gold rush of commodities out of the hills and into the wider world.
The year 2017 could well go down as the Year of the Midstream Deal.
On the day these words are being written, shortly before putting this issue to bed, yet another midstream deal hits the news.
The announcement arrived that, on Oct. 1, Global Infrastructure Partners entered into an agreement to buy the Medallion crude oil transportation system, deemed to be the largest such privately held system serving the Midland Basin. The $1.825 billion deal gives Global ownership of more than 800 miles of pipeline, 670,000 dedicated acres, and total areas of mutual interest approaching four million acres—assets sold to Global by Energy and Minerals Group and Laredo Petroleum. Global buys Medallion Gathering and Processing LLC outright, giving them a big stake in what has become one of the most interesting plays in all the Basin: the pipelines play.
Such is the level of activity in midstream that one can stop and reflect that, just four months ago, Medallion Pipeline itself announced it was doubling its footprint in the Basin, with pipeline expansions.
The transactions have come fast and furious in this space, and the ceiling seems still to be unknown. What’s certain is that it is a changed world, this business of operating midstream assets in the hottest upstream market in the world.
Midstream is Hot
The Global-Medallion deal is just one more instance of the sort of thing we’ve seen in abundance since about April. Midstream is hot. And Midstream is changing to adapt to a changing upstream environment.
Possibly the biggest change is one that will only be noted in passing here. That is the trend of developing pipelines that give producers “destination optionality” about where their commodities will flow: whether to the Gulf, or to Cushing, Okla., or to who-can-say. It’s the new practice of creating “shuttle” pipelines—these being intra-Basin pipelines that form a network capable of moving crude from the wellhead to multiple takeaway pipelines. These takeaway pipelines can be to Cushing or the Gulf or elsewhere, but the critical idea is that no longer is every producer locked into a pre-ordained endpoint for their product—not if a shuttle network services their play. Crude will be something one can shunt to a desired destination.
But destination optionality is itself a complicated subject, and it has been dealt with in greater detail elsewhere—such as at rbnenergy.com—for those who might want to explore further.
This business of optionality underscores the whole uptick in sophistication that midstream is assuming. The timing couldn’t be better.
Just six months ago, the news in midstream was decidedly less reassuring.
Back in May, the headlines were these: “That Was Fast: The Permian Basin is Running Out of Pipeline Capacity” (Motley Fool), “Permian Output Already Outstripping Pipeline Expansion Plans” (Midland Reporter-Times), and “Permian Pipeline Bottleneck Forces Steep Discounts” (Pipeline and Gas Journal).
Today, outlook is less pessimistic, if only because there’s been six months of aggressive commitment and construction of new pipeline projects linking the Permian Basin with the outside world. (See our accompanying chart for a sampling of the newly mobilized midstream scene).
Pipelines carry away any of three different hydrocarbon commodities: crude oil, natural gas, and natural gas liquids (NGLs). All three are spiking on the productivity scales, especially in the red-hot Delaware Basin play, and that region, accordingly, is getting much of the midstream attention. Natural gas, in particular, is being found in abundance, and until the pipeline systems can play sufficient catch-up, that commodity will continue to be flared, and revenues will be accordingly lost. But once the buildout catches up sufficiently—by, say, the year 2020—it is projected that the Basin’s gas output could be effectively doubled and our region will supplant the Marcellus as the biggest gas-producing region in the nation. But that is a superlative that awaits midstream’s touch, of course.
With so much natural gas being found today in the Basin, this trend doubtless has implications for the midstream sector, just as it does for the upstream sector. How much of the capex goes to crude, and how much to gas? We asked some midstream sources for comment. Andy Deck of Enlink Midstream said that is important for the midstream provider to stay fluid and responsive to whatever the market does.
“Enlink provides Midstream services both for crude producers as well as gas producers in the Permian, and, as you know, the developments out here tend to have both and maybe a little more crude reserves than gas reserves,” Deck said. “It’s one of those things that the market dictates. You can look back just a few years and see that gas was the commodity that was in demand. The E&P companies were focused on finding the gas plays and there was the shale gas boom. Then, being victims of our own success, as we found plenty of gas, then we begin seeing everything is shifting back towards oil, which [at that time] seemed to be a little more scarce. Now we’re seeing that our E&P cousins, when they’re given a challenge, do a good job of tackling that challenge. So what we try to do is provide services across both [oil and gas]. So we want to be flexible so that we can adapt and accommodate as our customers change their plans or their directions–even slightly—then we’re able to do that as well and reflect those changes.”
(Deck is interviewed in an accompanying Q-and-A. Incidentally, he was CEO of Coronado Midstream at the time of Enlink’s acquisition of Coronado, and that is how he came to be part of the Enlink team.)
Magellan Takes Sail
On the crude front, one of the Basin’s larger new projects will be the latest effort from Magellan Midstream Partners.
Magellan Midstream Partners owns and operates the Longhorn pipeline system which originates in Crane, Texas, and transports up to 275,000 barrels per days of crude oil to our terminal in East Houston Texas. According to Magellan’s Bruce Heine, the company’s vice president of government and media affairs, Magellan “will build an approximately 60-mile, 24-inch pipeline from Wink to Crane, Texas, which serves as an origin to Longhorn pipeline. The new Wink pipeline will have an initial capacity of 250,000 barrels per day with the ability to expand to more than 600,000 bpd if warranted by industry demand.”
The project also includes construction of a new terminal at Wink which will offer broad inbound and outbound pipeline access to parties that connect to the facility.
Magellan is a 50/50 joint venture owner and the operator of the BridgeTex pipeline which originates in Colorado City, Texas and transports up to 400,000 barrels per day of crude oil and condensate to our terminal in East Houston. In addition, if warranted by customer demand, BridgeTex may further expand the capacity of the line up to approximately 440,000 barrels per day, which is what we estimate to be the maximum capacity of the line at this time.
Heine indicated that Magellan is also evaluating a new pipeline to transport crude oil and condensate from the Permian Basin to Corpus Christi. It is still too early to provide any clarity on the likelihood, timing or economics of this potential project given the current dynamics of the crude oil markets. Magellan is actively advancing other strategic development opportunities in the Permian that will complement its existing assets in the basin.
Magellan currently expects the project to cost approximately $150 million and to be operational in mid-2019, subject to receipt of any necessary permits and regulatory approvals.
“Magellan is known in the industry for its independent service provider business model and is ideally situated to meet growing industry demand for a crude oil and condensate pipeline system with access to customers originating from the Delaware Basin,” Michael Mears, chief executive officer, said recently in a prepared statement.
Gas as Export
A decade or more ago, natural gas was not thought of as an export product. That’s changing. Two recent developments have accelerated that trend: the prospects of pipelining natural gas to Mexico, and the prospects of compressing natural gas on the Gulf and loading the resulting LNG onto ships bound for overseas markets.
We asked Enlink’s Deck what the export market might mean, where companies like his own are concerned.
“Natural gas is, right now, a commodity that we have more of than what we’re using here in the United States, so, yes, exporting it is key to balancing out the market,” Deck said. “Again, we’ve seen some large pipeline projects to Mexico, some that have been completed, some that are still in development, but Mexico is expected to become a greater importer of gas, and so that’s good, especially here in the Permian Basin. As to the LNG technology, there’s a number of terminals that exist on the Gulf Coast, and a number of additional terminals that are under consideration, and as those see completion, that’s just another market that the gas can go to. So it’s a way in which we can potentially strengthen the value of natural gas.
“As you look around the world, natural gas in other parts of the world is generally valued more highly than it is here, so if we can efficiently take some of our product to those markets then it will strengthen the price here, and so we would benefit. I would say, Enlink would benefit from the natural market reaction to additional demand, because the price [for gas] is generally going to strengthen a little bit.”
What’s the Watchword?
It should be obvious that midstream is a sector in transition, and it’s moves are increasingly drivers that affect upstream and downstream as well. Especially upstream. Without adequate cooperation between the midstream infrastructure-providers and the upstream oil-finders, producers can get stranded and billions in assets can get squandered.
So, it should be asked: In these days of heavy midstream expansion, is there something that all midstream companies ought to be careful about, or always do? Andy Deck responds.
“One of the things that has become an increasing challenge for midstream companies is that our E&P companies have gotten better and better at what they do, and so—while that sounds like that ought to be a good thing, and it is a good thing, still—it means they can make a decision and their time to drill and complete has gotten shorter. You know, you don’t hear about dry holes anymore, right? Well, they’re developing resource and they’re not being unsuccessful very often, and so what that means is that the increases can oftentimes come very quickly and building midstream assets takes time.
“So we have to be in even closer communication with our customers to make sure we understand their plans,” he concluded. “What we don’t want to have happen is this: they spend the money to go out and drill the wells and we don’t have the midstream infrastructure in place to handle the oil and gas that they’re producing from those wells. So all midstream companies are being challenged to stay in close communication with the E&P companies to make sure that we’re keeping pace with their plans and with their successes. At the same time, one of the bad things for any midstream company is to go out and build an asset then see the asset sit idle, or sit under-utilized. And so it’s trying to find that balance between keeping up with our customers but not overbuilding such that we have some underutilized assets, which are just inefficient.”