US oil and gas in 2015: a whole new ballgame (part 3)

M&A

All this activity has spurred an impressive round of mergers, acquisitions and restructuring. In October, Western Gas Partners (formed by Anadarko) announced it would acquire Nuevo Midstream for US$1.5 billion in cash. Nuevo has extensive gas gathering lines and processing facilities in Texas.

American Midstream purchased Costar Midstream from Energy Spectrum. Assets from the US$470 million deal include gas gathering and processing facilities in Texas, and an oil gathering system in North Dakota’s Bakken shale.

Targa Resource is acquiring Atlas Pipeline Partners and Atlas Energy for close to US$6 billion. The deal gives Targa complementary assets in Oklahoma, Mississippi, Texas and Louisiana.

Occidental Petroleum is selling its 50% interest in BridgeTex Pipeline to Plains GP Holdings for US$1.075 billion. BridgeTex is a JV between Occidental and Magellan Midstream that operates a 300 000 bpd crude line from the Texas Permian basin to the Houston Gulf Coast region.

Kinder Morgan is undergoing a massive internal restructuring to bring all of its assets under one roof. The US$70 billion deal is in response to investor concerns that the current corporate structure is too complex for markets to effectively price. Kinder Morgan operates (or is in partnership) with 80 000 miles of gas, oil, refined products and CO2 pipelines under various entities, including Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline.

Growing pains

There is much concern regarding the growing use of hydrocarbons. Greenhouse gases have climbed dramatically in the last century, to the point where climate scientists are warning that global increases in temperature will lead to sea rises, catastrophic weather events and environmental degradation. Much attention has focused on the oilsands, which require extra energy to remove from the ground and upgrade. Critics have focused on crude pipelines as a proxy to prevent the growth of the oilsands. TransCanada first proposed the Keystone XL line in 2008, but public protests have thwarted presidential approval and kept the project in limbo. The company recently reported that the projected cost has risen to US$8 billion from the original US$5.4 billion estimate.

Concerns over hydraulic fracturing (also known as fracking), have arisen; some of the chemicals used in the procedure could contaminate local drinking supplies, and several jurisdictions have banned it until more is known. Recently, citizens in the Texas city of Denton voted to ban further permitting of hydraulic fracturing within municipal boundaries. Opponents successfully argued that fracking pollutes air and drinking water, and that the disposal of the vast amounts of water produced by the drilling process could cause earthquakes. Denton sits atop an immense resource; the development of the Barnett shale pioneered the economic production of shale gas. If opposition grows and more bans ensue, however, the midstream sector would be adversely impacted as the growth in gas production slows, or reverses.

Enbridge’s proposed Alberta Clipper expansion has also been delayed. The multi-phase project was originally designed to increase capacity by 350 000 bpd, to a total of 800 000 bpd. Although the Alberta Clipper has been operational since 2009, the expansion still needs a presidential permit, which has not been forthcoming in time to begin the project.

In a rare move, federal officials filed felony counts involving safety violations against Pacific Gas and Electric Co. The action was in response to a 2010 natural gas line explosion in the San Francisco area that levelled the suburban neighbourhood of San Bruno, killing eight and injuring dozens. Prosecutors allege that PG&E knowingly relied on erroneous and incomplete information when assessing the viability of the line that eventually ruptured. Under the charges, PG&E could face more than US$6 million in fines.

In a prepared statement, PG&E Chairman and Chief Executive Officer Tony Earley said Tuesday the company is holding itself accountable. “We have worked hard to do the right thing for victims, their families and the community, and we will continue to do so. We want all of our customers and their families to know that nothing will distract us from our mission of transforming this 100+ year old system into the safest and most reliable natural gas system in the country.”

Solutions

Work is continuously underway to achieve approval of the Keystone XL pipeline. Both Canadian and US regulators are urging President Obama not to delay the project any longer; now that the mid-term elections are over (and control of both the Senate and Congress is now in the hands of Republicans), a solution may be found. TransCanada has resubmitted a new ROW that avoided ecologically sensitive regions in Nebraska and agreed to stringent construction guidelines.

Issues surrounding hydraulic fracturing are also being addressed. The industry has been promoting understanding of the practice through education efforts and public announcements. Frack companies are devising new frack chemicals made from benign household products and food ingredients, and reducing the amount of water used. Service companies are building portable modules to recycle frack water that returns to surface.

Oil producers are increasingly turning to crude-by-rail to avoid bottlenecks and delays to pipeline approvals. Oilsands operators have been shipping approximately 180 000 bpd by rail to the US. According to Fitch, a consultancy, companies in the Bakken region alone are shipping approximately 600 000 bpd by rail. There is much room for expansion; analysts report that the rail sector has plans to increase rail loading capacity in both Canada and the US to more than 1.1 million bpd.

The near term future of the US oil and gas sector has been clouded by OPEC’s recent decision to continue producing 30 million bpd, a move that has helped to substantially reduce the price of crude. Analysts ponder how significant the gyrations will be upon unconventional production in North America; few doubt that higher-cost plays could see curtailment.

But the world energy market will eventually stabilise, and new plays that offer good economics will emerge. The Woodford shale in the South-Central Oklahoma Oil Play (SCOOP) has been the main target for unconventional operators, but recently, Continental Resources drilled four delineation wells into the overlying Mississippian Springer shale. Initial production tests ran from 1000 - 1800 boe/d (averaging 80% oil). While smaller in areal extent than the massive Marcellus or Eagle Ford shales, the Springer is actually a mix of shale and sandstone, and thus has a much slower decline – total production is estimated at 1 million boe per well. The Springer alone is expected to peak at 1 million bpd next decade, but plays just like it are dotted all over the American landscape, and that means there will be plenty of pipeline work to go around for many years to come.

Written by Gordon Cope and edited from published article by Elizabeth Corner

To read the full version of this article, please download a copy of the February 2015 issue of World Pipelines.

Published on 13/03/2015


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