Beyond Commodity Prices – The Story on Midstream Oil & Gas Opportunities in 2015

The latest news covering the oil and gas market for 2015 focuses almost entirely on the detrimental effects of low prices on exploration and production, making it easy to miss the bigger picture. Just as the fluctuations of the stock market do not reflect the entire state of the US economy, commodity oil and natural gas prices do not tell the whole story of our industry. Even in the face of a 50% drop in the price of a barrel of oil, and a reduction in natural gas prices, opportunities still abound for investment, especially in the midstream segment.
Since 2007, previously non-productive shale reserves have come online to unlock a wealth of new oil and gas supplies. However, the resulting surge of shale-related production revealed deficiencies in both the quantity and condition of our existing infrastructure used to bring these products to market.

Production holds steady, may rise in 2015
Even in light of the plunge in oil prices and cuts in upstream investments, oil and gas production continues to hold steady and may potentially rise in 2015. Recent US Energy Information Administration (“EIA”) forecasts of US crude oil production from shale and tight oil plays project production rising from an average of 8.6 million bbl per day in 2014 to a projected 9.3 million bbl per day in 2015.

While many exploration and production companies have begun implementing budgets cuts, rig stacking, and layoffs, they are expected to maintain their investments in certain core tight oil plays including the Bakken, Eagle Ford, Niobrara, and Permian basins.

Likewise, according to EIA’s, Natural Gas Annual, gross production from shale gas wells increased from 5 Bcf per day in 2007 to 33 Bcf per day in 2014, equivalent to 40% of total US natural gas production, and exceeding production from all non-shale natural gas wells. The Pennsylvania Marcellus play became the second largest gas producing region in the country with 8 Bcf per day of production in 2013. The Marcellus formation is likely to exceed the entire projected gas demand in New England and Mid-Atlantic regions by 2016, growing from 1.9 Tcf per year in 2012 to an anticipated 5 Tcf per year in 2022.

Despite the current pullback in exploration and production, these massive volumes of oil and gas are driving the continued need for investment in downstream links of the production value chain. As usual, investments in the midstream sector are lagging the upstream production spending by two to three years. This has resulted in bottlenecks within the transportation systems and price volatility for both the producers and buyers.

In order for the producers to monetize their reserves, the production must be moved to market.

Designing, permitting, and constructing these facilities is challenging and the ability to deliver the planned projects safely, on time, and on budget, is a key requirement. The demand for service providers catering to the needs of the infrastructure developers is ongoing. Speed to market for these gathering, processing, and pipeline companies is essential.

Significant staying power
A December 2013 report on oil and gas transportation and storage infrastructure by IHS Global for the American Petroleum Institute (“API”) found significant staying power in the level of capital expenditures needed throughout the 2014 to 2025 forecast period. So strong is the need to ensure the growth of midstream infrastructure that API has just set up a new department to focus on issues related to infrastructure and transportation of oil and natural gas.

Supporting this view, there has been little real world indication by midstream companies that investment is being curtailed over the next 12 to 18 months. In fact, some of the largest players have positioned themselves during the past year for growth in 2015 and beyond.

For example, some companies consolidated their holdings into a corporate structure to lower the cost of equity capital and make it easier and more profitable to proceed with facility expansions and targeted acquisitions. Others have restructured their midstream pipeline assets into tax advantaged MLP structures. Yet others have taken advantage of the existing low interest rates to refinance their outstanding debt. None of these moves signal a retrenchment in the midstream sector of the market.

Location influences opportunities

In addition to the financial considerations driving the investment in new gathering, processing, and pipeline infrastructure, the location of the booming shale production also influences these investment opportunities.

Traditionally, the majority of US oil and gas production flowed from the Gulf Coast and Mid-continental regions of the country to the Northeast, Midwest, and West. The vast majority of gas treatment and processing infrastructure is co-located in these production regions. Also, the center of gravity of the US chemical and refining industry consuming this oil and gas is situated along the Gulf Coast.

With the increased Marcellus and Utica shale gas production servicing the major markets in the Northeast, the need for pipeline capacity from the southwest decreases. As a result, pipeline operators are investing in significant new capacity and system modifications to move the Northeast gas supplies bi-directionally, i.e., both north and south.

Yet another issue that will yield opportunities for midstream investments is the quality of the Marcellus Shale natural gas production. More gas production has driven the need for more gas treatment and processing in the Marcellus region. The Marcellus gas must conform to the gas quality specifications of the pipelines and local utilities. This also includes the immediate problem of the removal of large amounts of excess ethane.

Across the industry, expansions to existing gas processing plants are being proposed as shale gas production grows. While the timing of these projects may be affected by the current commodity prices, they remain strong midstream investment opportunities.

Speed to Market

Once again, a driving factor for these investment is, “speed to market,” allowing the product to be delivered to market quicker and more economically. Companies with the experience and know how to develop and implement strategies for delivering these projects, from inception, permitting, and construction, will be in demand.

As we move through 2015, much of what is needed to spur these midstream oil and gas infrastructure investments is in place, but the pathways to success are far from certain. Success depends upon many factors including commodity prices and continued overall US economic health. However, equally important is the ability of companies to understand the environmental, engineering, and regulatory challenges inherent with these large capital investment opportunities and how to address them.

Whether it’s knowing how to traverse a wetland, culturally significant geography, remediating existing brownfields, or employing the best sustainable development practices for the project, employing firms with the proper knowledge and technical capabilities needed to deliver under difficult conditions is essential. We don’t lack for oil and gas sector investment opportunities, and success will follow those companies who can muster the understanding, skill, and experience needed to capitalize on these challenges.