The industry’s “mid-section,” the midstream sector, is in the midst of a massive metamorphosis.
By Al Pickett, special contributor
To the moon and back: That is how Thure Cannon describes the extensive oil and gas pipeline network in Texas.
“According to the Texas Railroad Commission’s Pipeline Mileage Chart, there are more than 425,000 miles of pipelines in Texas,” said Cannon, president of the Texas Pipeline Association, the largest state trade association in the country representing solely the interests of the intrastate pipeline network. “Due to a dramatic increase in the state’s oil and gas production, the demand for additional pipelines is expected to continually increase in the coming years. Within the next five years, it is conceivable that there will be enough pipelines in Texas to go to the moon and back.”
Cannon noted that, according to the mileage chart, 60,000 of those 425,000 miles of pipelines have been built in the last four years alone, indicative of the remarkable growth that the state’s oil and gas industry is experiencing. “And there is still need for more,” he added.
High-angle view of the Bearkat processing plant, operated by Enlink.
With crude oil production now topping three million barrels per day in Texas, the midstream industry is becoming increasingly important to process the natural gas and move the liquids and gas to refineries, petrochemical plants, and end users across not only the state, but also the entire nation.
As the nation’s top producing basin, the Permian Basin, of course, is at the forefront of this amazing growth of the midstream segment of the oil and gas industry.
Chris Keene, president and chief executive officer of Rangeland Energy, headquartered in Sugar Land, said his company was formed in 2009 to focus on developing, acquiring, owning and operating midstream assets. He pointed out the importance of investing in midstream to develop the nation’s shale resources plays.
“Our private equity provider, EnCap Flatrock Midstream, has done a ton of analysis and believes that for every dollar spent on the upstream side of the oild and gas business, 15 to 35 cents is spent on midstream infrastructure and services,” he stated. “You have to be able to move the oil and gas.”
Economic Impact
The Jerry S. Rawls College of Business and the Bob L. Herd Department of Petroleum Engineering at Texas Tech University recently conducted a joint-department study, commissioned by the Texas Pipeline Association, to address the current and future economic impacts of the Texas oil and gas pipeline industry.
Bradley T. Ewing, Ph.D., Rawls Professor of Energy Economics, said the study revealed that through ongoing operations and construction in 2013 alone, Texas’ oil and gas pipeline industry provided $33 billion in economic impact, supported more than 165,000 high-paying jobs, contributed an additional $18.7 in gross state product, and injected $1.6 billion in state and local government revenues.
“The pipeline industry is vital to the oil and gas industry as a whole,” he added. “It is important, too, to attract oil and gas investment.”
Ewing noted that 48 percent of the drilling rigs in the United States and 25 percent of the operating rigs in the entire world are in Texas.
“Fifty-six percent of those rigs in Texas and 14 percent of the operating rigs in the world are in the Permian Basin,” he continued. “Companies in the Permian Basin are investing in horizontal drilling.”
Ewing pointed out that in 2012 the majority of the wells drilled in Texas RRC District 7C (the San Angelo district that includes that much of the burgeoning Wolfcamp Shale horizontal play on the eastern side of the Midland Basin) were vertical. By 2013, that number had flip-flopped to nearly 75 percent of the wells being drilled were horizontal.
By connecting upstream to downstream, from wells to end users, the Texas Tech study claimed pipelines play a significant role in value creation and economic sustainability in the state. In turn, this core activity leads to a number of non-core, but very critical, supply chain activities, such as the construction of pipelines, processing plants, meter stations, compressors, and fractionators, as well as equipment manufacturing, according to the report. The second tier benefits of the pipeline industry flow directly into the operations of suppliers, both wholesale and retail, and include real estate and housing, financial services, etc., and provide a positive boost for local economies.
The Texas Tech study projected that by 2024, the total economic impact from Texas pipeline operations and construction will generate between $30 billion and $41.4 billion in economic output, 150,000 to 206,000 jobs, $17 billion to $23.4 billion in additional gross state product, and $1.5 billion and $2 billion in state and local government revenues.
Takeaway Capacity
The current crude oil pipeline takeaway capacity from the Permian Basin is about 1.19 million barrels per day, according to the Texas Tech report. The Plains All American Basin Pipeline is the largest conduit out of the Permian Basin, carrying 450,000 barrels per day from Colorado City to the industry’s hub in Cushing, Okla. The Centurion Pipeline also carries crude oil to Cushing. The Magellan Longhorn Pipeline runs from Crane to Houston and Texas City, while the Sunoco WTG Pipeline carries crude to Longview, Houston, and Nederland.
There are also four local refineries in West Texas and New Mexico (in El Paso, Big Spring, Borger, and Artesia, N.M.) that consume an additional 450,000 barrels per day of Permian crude production.
A trencher at work on a Bearkat gathering line.
While the Permian is a liquids-rich basin and most of the pipelines are designed to deliver crude oil to refineries along the Texas Gulf Coast and other areas of the country, Marshall C. Watson, Ph.D., maintained that takeaway capacity for natural gas is critical in the development of the region’s crude oil production.
Watson is Roy Butler Chair/Department Chair of the Bob L. Herd Department of Petroleum Engineering at Texas Tech. He pointed out that the repeatable, predictable resource plays are producing natural gas and natural gas liquids, as well as crude oil.
“Producers want to get their wells on stream to sell their liquids as quickly as possible,” he commented.
If there isn’t takeaway for the natural gas, producers are forced to flare their gas, which Watson claimed is costing Permian Basin operators as much as $210,000 per day in additional revenue.
Another trencher at work on a Bearkat gathering line.
Another key role that pipelines offer is the ability to take the Permian Basin’s crude oil to multiple markets, according to Watson. For example, a recent analysis by the U.S. Energy Information Administration noted that crude oil prices in Midland have been falling below similar crude priced at Cushing, due to increasing production in the Permian Basin and insufficient pipeline systems to move the crude to refineries.
A Sept. 23 report from EIA claimed the increased production and a series of recent outages at refineries in or near the Permian Basin and along the Gulf Coast caused the West Texas Intermediate price at Midland to fall $17.50 per barrel below the price at Cushing, a record difference.
Improvement is on the way, however. The 300,000 barrels-per-day BridgeTex Pipeline, a joint venture between Occidental Petroleum and Magellan Midstream, came online recently and is now moving crude from Colorado City to Houston. Beginning in early 2015, the Cactus pipeline, with an expected capacity of 200,000 barrels per day, will move Permian crude south to connect with an expanded Eagle Ford pipeline that will deliver crude to Corpus Christi. Sonoco Logistics’ Permian Express II pipeline is expected to come online in mid-2015, with a capacity of 200,000 barrels per day from Colorado City to Nederland. The current Longhorn Pipeline, operated by Magellan, is expected to expand to 275,000 barrels per day from its current 225,000 barrels per day.
It’ll all be needed.
“If you drive from Lubbock to Midland to Big Lake, you will see compression stations and gas treating facilities everywhere,” Watson observed.
Serving the Wolfcamp/Wolfberry
In March, Devon Energy Corporation and Crosstex Energy announced the formation of a new oil nad gas midstream services company, EnLink Midstream. Brad Iles, senior vice president of business development for EnLink, said Crosstex and Devon had a close working relationship dating back to 2006 when the two companies completed a $2.5 billion joint agreement to acquire privately held chief holdings assets in the Barnett Shale, with Devon acquiring the E&P assets and Crosstex acquiring the midstream operations.
“We always thought the combination of our assets made sense but the timing wasn’t right. The two companies revisited the idea of joining assets in 2013, and both felt the time was right,” Iles explained.
As part of the transaction, Crosstex acquired midstream assets from Devon with equity in the Barnett Shale, as well as processing plants and gathering systems in the Cana Woodford and Arkoma Woodford in Oklahoma and dropped them into Enlink. As a result, Devon has a significant ownership interest in Enlink.
In addition, Enlink operates in the Gulf Coast and Appalachian regions, as well as in the Permian Basin.
Iles said Crosstex’s legacy operations in the Permian Basin include the 58,000 MMcf/d Deadwood gas processing plant, which is a 50/50 joint venture with Apache Corporation, in Glasscock County, as well as a liquids gathering system at its Mesquite fractionator and a rail terminal in Midland.
“At the time we built the Deadwood processing plant in 2012, there was no pipeline or gas processing capacity to take liquids out of the Wolfberry play area, which was developing quickly,” Iles pointed out. “We bought the out-of-service Mesquite fractionator and rail terminal in Midland and refurbished it to take the liquids off the Deadwood plant. We also send the heavy crude to our fractionator in Eunice, La., on railcars and send the ethane down the pipeline. By doing that, it was a very creative solution for Apache to ramp up its Wolfberry operations while everyone else was constrained.”
EnLink Midstream is continuing to expand its gas gathering and processing capabilities on the eastern side of the Midland Basin, where horizontal drilling in the Wolfcamp Shale is producing great results. Iles said the 60 MMcf/d Bearkat processing plant and a 30-mile high-pressure gathering system in Glasscock and Reagan counties were completed in September.
The initial gathering system runs south of the Bearkat processing plant. Now, EnLink is building a 35-mile pipeline that will run north from the Bearkat plant to the Howard-Martin county line.
“We are providing constrained producers with takeaway capacity,” Iles explained. Natural gas liquids are moving via the DCP Sandhills pipeline to the Gulf Coast and South Louisiana, where he said petrochemical plans are short of ethane. The Bearkat plant also has connections at its tailgate to Atmos and El Paso natural gas pipelines.
EnLink is also building the Ajax Processing Plant, a new 120 MMcf/d gas processing plant that will be supported by Devon, which has a large position in Martin County. Iles said that the Ajax plant will be located near the Howard-Martin county line.
As part of the project, EnLink Midstream will further expand its rich gas gathering system by constructing multiple low-pressure gathering pipelines and a new east-west 23-mile, 12-inch high-pressure gathering pipeline that will tie into the company’s previously announced Bearkat natural gas gathering system. The new pipelines are expected to be operational in the first quarter of 2015 and the new processing plant will be operational in the second quarter of 2015. Upon completion, EnLink Midstream will have invested more than $400 million in capital in the Permian Basin.
Rail Option
Rangeland Energy is constructing a crude oil and frac sand rail terminal in the Delaware Basin that will provide an option for producers looking for the best price for their product. The Rangeland Integrated Oil System (RIO System) will serve producers in two ways, according to company president and CEO Chris Keene, bringing in frac sand on the front end and serving as an export solution for crude oil and condensate on the back end. “It will help producers with a better and more readily available supply of frac sand,” maintained Keene. “And it will offer a rail option as an export solution for the crude oil and condensate that will be produced.
“With natural gas, you have to have a pipeline,” he continued. “With oil, you have more flexibility. Pipelines are more efficient, but you can truck it or ship it by rail. Shipping crude oil by rail is here to stay because it provides optionality.”
He said there are a couple advantages to being able to export the crude oil and condensate by rail. “One is being able to access higher-value markets, whether it is on the West Coast or another Gulf Coast facility that isn’t accessible by pipeline,” Keene explained. “In some cases, the pipelines are saturated and the condensate, which is 45- to 55-degree gravity, can’t be blended into the WTI-like crude oil. If you can’t put any more crude into the pipeline, rail is an option. We will be able to send the condensate directly to a refinery or petrochemical plant, or to a splitter on the Gulf Coast where it can be broken into other products for export. A lot of the condensate in the Delaware Basin may be shipped to Canada, too, to dilute the heavy crude oil being produced up there. The Canadian crude is too heavy to go through pipelines without being mixed with condensate.”
Keene added that another option will be to export the condensate either via the Texas Gulf Coast or the West Coast if the government approves the expanded export of the ultra-light stabilized condensate, something that he says has to eventually happen.
The RIO Hub, a 300-acre rail terminal located near Loving, N.M., just south of Carlsbad, is in the center of the Delaware Basin’s drilling and production activity, which is why Keene says Rangeland chose the location. “It is close to the wellhead for all activities,” he emphasized.
The RIO Hub will serve the Delaware Basin by providing storage, blending, and rail-loading facilities for outbound crude oil and condensate. Fee-for-service customers include crude oil producers, marketers, and refiners. Truck-to-rail transload operations will have an initial capacity of 10,000 barrels per day. As customer demand increases, Rangeland will build high-speed unit train loading facilities at the RIO Hub that will bring capacity to more than 100,000 barrels per day.
Transload service to bring frac sand into the terminal began in October, and outgoing crude oil service is scheduled to begin in November. “Service and revenue by Halloween,” Keene quipped.
Frac Sand Services
Rangeland’s RIO Hub near Loving, N.M., provides frac sand suppliers with rail unloading, storage, and truck-loading facilities for moving product into the surrounding Delaware Basin by rail. Initial rail-to-truck trans-load service is scheduled to begin at the end of October and will accommodate more than 500,000 tons of frac sand per year. When unit train service becomes available and as demand increases, Rangeland will expand the frac sand infrastructure to accommodate more than 1 million tons of frac sand per year. The RIO Hub also provides storage and transload service for outbound crude oil and condensate.
Rangeland Energy announced in September that the company had signed a multi-year agreement with Halliburton, whom Keene describes as one of the largest, if not the largest, service provider in the Delaware Basin. Rangeland will provide frac sand rail unloading, storage, and distribution service to meet Halliburton’s regional frac sand requirements.
The RIO Hub is served by the BNSF Railway.
RIO Pipeline
In addition to the rail terminal at Loving, N.M., Rangeland is also developing the RIO Pipeline project that will include a 30-mile, bi-directional crude oil pipeline to connect the RIO Hub with the RIO State Line Terminal, a gathering hub at the Texas-New Mexico border, where Rangeland will provide tankage and truck unloading facilities. An additional 104 miles of pipeline will connect the RIO State Line Terminal to the RIO Midland Terminal.
“Most of the production in the Delaware Basin in West Texas and southeastern New Mexico is taking place within a 25- to 50-mile radius of the State Line Terminal,” Keene pointed out. “We will be able to move crude oil east to various terminals in Midland and interstate pipelines to Cushing (Okla.) and Gulf Coast markets, or we will have the option to flow it back to the hub in Loving and then go out by rail. Two large producers have told me that they want to have rail as an option. It will be a bigger part of the Delaware Basin story for the next five years.”
Keene said land has been secured for the State Line and Midland terminals, and Rangeland is procuring the right-of-way for the pipelines and working to get commitments from shippers on the RIO Pipeline. He added that he hopes construction on that phase of the project will begin before the end of the year.
“We are extremely bullish on the Delaware Basin,” he continued. “The Delaware Basin used to be considered a stepchild to the Midland Basin and its historic fields. But now we are hearing there are eight to 10 different pay zones in the Delaware Basin. We are very bullish on its future.”
Other Projects
A number of other midstream projects have been announced in the last six months by a variety of companies. Dallas-based Lucid Energy Group is building the Big Lake plant in Reagan County. It will have natural gas processing capacity of 200 MMcf/d and will connect to Lucid’s 450-mile pipeline system and support natural gas production from the Wolfcamp play in Irion, Reagan, and Crockett counties. The plant is expected to be in service in the first quarter of 2015.
Ironhorse Permian Basin co-founder Khory and Kyle Ramage have built a 36-acre rail terminal in Artesia, N.M., to unload sand and load crude to serve the Delaware Basin. The terminal has 9.5 miles of track and connects to the BNSF main line.
Houston-based Canyon Midstream Partners is expanding its James Lake cryogenic gas processing plant in Ector County to 100,000 MMcf/d by adding a 30-MMcf/d cryogenic turbo expansion train. The James Lake system consists of 60 miles of 12-inch trunkline and six field compression stations that provide low-pressure gathering to Ector, Andrews, Martin, Dawson, and Gaines counties. Phase II of the James Lake System is expected to begin operating in 2015. It will consist of a second 100-MMcf/d cryogenic gas plant in Martin County and 60 additional miles of trunkline, expanding the system into Howard and Borden counties.
Tulsa-based Alpha Crude Connector is building a crude oil pipeline in Lea and Eddy counties in New Mexico and Culberson, Loving, Reeves, and Winkler counties in Texas. It will accept at least 100,000 barrels per day from numerous lease tank batteries and other field receipts and a truck terminal in the northern Delaware Basin.
Dallas-based Murex and Carlsbad-based Cetane Energy is doubling the operational capacity at their Cetane crude oil transloading terminal in Carlsbad, N.M. The two companies initially installed 40,000 barrels of crude oil storage, 12 tank truck offloading stations, and more than 18,000 feet of rail track to accommodate unit train loading. The expansion will allow for the loading of another 40,000 barrels per day by July 2015.
Al Pickett is a freelance writer in Abilene and author of four books. He also owns the West Central Texas Oil Activity Index, a daily and weekly oil and gas reporting service. For more information, email apickettc@sbcglobal.net.