N?atural gas liquids (NGLs) production is on the upswing throughout the U.S. as producers focus on liquids-rich unconventional-resource plays, and conventional areas are reworked with new drilling and completion technology. It’s a fertile environment for midstream developers to provide needed infrastructure, especially gas-processing and fractionation capacity.

One of the most geographically diversified midstream companies, DCP Midstream LLC, based in Denver, is thriving as it plans expansions of existing facilities or new plants and lines to help solve take-away constraints and support drilling projects.

Recently, DCP Midstream’s Rose Robeson, group vice president and chief financial officer, outlined the company’s strategies in the Rockies, the Permian Basin and the Eagle Ford shale, all areas of robust drilling due to oil and liquids-rich-gas production. DCP Midstream LLC, owned 50/50 by Spectra Energy and ConocoPhillips, is well equipped to move on opportunities thanks in part to its DCP Partners MLP subsidiary (owned about 70% by public unitholders), which provides equity and debt funding. DCP Midstream, a pure play on the sector, also accesses the debt capital markets.

Robeson discussed Midcontinent and Gulf Coast midstream development as well, and offered the company’s outlook for the NGL markets in general. She spoke to the Energy Finance Discussion Group in Denver.

NGL production is on the rise—or at worst, flat—in most of the U.S. Drilling in the Rockies, the Marcellus, the Gulf Coast and the Permian Basin is driving higher NGL output; production in the Oklahoma and the Panhandle, the Barnett and Haynesville shale areas is flat, due to a preponderance of dry-gas production. With crude prices strong, many producers are honing in on the liquids-rich Eagle Ford and the Permian’s Avalon (Bone Spring) shales, and the simmering Niobrara-Codell play in Colorado and Wyoming.

“Midstream is going to require significant capital to build the infrastructure for gas gathering and processing and NGLs fractionation and take-away capacity to meet producers’ needs,” Robeson said. “For midstream companies, having the corporate structure and financial flexibility to accomplish this will be key, whether through MLP structures or some other route.”

She noted that in regions such as the Midcontinent, production declines in conventional plays have been offset by upticks in the unconventional tight-sands Granite Wash, and the Woodford shale. Likewise, in the Rockies, the dry-gas Piceance Basin has quieted, but the Denver-Julesburg Basin is increasingly busy thanks to its rich-gas production and development of the Niobrara shale.

“Liquids production can increase the netback value to producers by well in excess of $2 per million Btu—not an insignificant amount,” noted Robeson. “That’s why drilling is so focused in those areas.”

As producers step up activity, they need incremental fractionation and pipeline capacity to take NGLs to the Gulf Coast and Mont Belvieu, which offers the strongest pricing on a differential basis. Numerous projects to expand fractionation capacity are under way or have been completed targeting Gulf Coast markets, Robeson said. In the Marcellus, a number of NGL take-away projects have been announced as well.

DCP has gathering, processing and storage facilities in the Gulf Coast, Rockies, and Midcontinent, and propane terminals in the Northeast. In mid-2010, it announced a joint venture with EQT Corp. in the Marcellus, but that deal was terminated in January 2011 when EQT instead sold its 100-million-cubic-feet-per-day cryogenic processing complex in Langley, Kentucky, and the associated NGL pipeline to MarkWest Energy Partners, also based in Denver, for $230 million. The plant handles EQT’s production from the Huron/Berea shale. MarkWest established a long-term processing and NGL transportation, fractionation and marketing agreement with EQT as part of the deal.

DCP is continuing to seek entry points into the Marcellus shale midstream market, Robeson said. The company, through its MLP, acquired a propane and butane storage facility in Marysville, Michigan, for $95 million, in January. This deal helps DCP Midstream Partners bulk up its wholesale propane and NGL logistics businesses, which make up about one-fourth of the partnership’s revenues, according to a report from Morningstar.

In all, DCP has some 60 processing plants, 10 fractionators, and more than 60,000 miles of pipe. “The point is, geographic diversity sees you through the difficult times,” said Robeson. DCP is the largest NGL producer in the U.S. and the largest pure-play gas gatherer and processor. It operates mostly off percentage-of-proceeds contracts.

“These prolific shales are not all equal, and some companies move from area to area. In some cases, they are drilling to hold acreage. One challenge for a midstream company is to construct gathering for high-initial-production wells that deplete quickly,” Robeson said. “Systems have to handle extremely high production wells but convert from high to low pressure as production declines. Midstream companies have to match buildout with the risk-reward of infrastructure to make a return on capital employed.”

Where the liquids are

Like others in the midstream sector, DCP is expanding its operations in the liquids-rich producing areas of the D-J, Eagle Ford, Woodford, Marcellus, and Avalon shales.

In the D-J, where horizontal drilling in the Niobrara shale is under way, the company has several projects in the works. Noble Energy Corp. is currently the largest producer there, especially since its acquisition of Suncor in 2010. A little more than a year ago, DCP partners bought the Wattenberg Pipeline from Buckeye Partners LP to help secure NGL take-away capacity to Conway, Kansas. DCP owns several gas-processing plants in the D-J and is upgrading its Mewborne plant in Weld County, replacing 75-million-cubic-feet-per-day with125 million of new capacity for incremental capacity of 50 million per day. The company’s total processing capacity in the D-J is 400 million cubic feet per day; it plans to build an additional processing plant there scheduled to begin operation in 2012.

NGL production is on the rise—or at worst, flat—in most of the U.S.

In the Eagle Ford, DCP can leverage off its existing asset base, Robeson noted. It has five processing plants with more than 800 million cubic feet per day of capacity, and 250 million of that is available, along with associated local fractionation capacity. The company has agreements with seven producers for production from 450,000 acres in the play. It has also signed with Trunkline Gas pipeline as an anchor shipper on a modified portion of the Trunkline system in South Texas.

“The Trunkline arrangement allows us to create a “super system,” giving us connections between plants, so that if we take one down for a turnaround, for example, we can ship to other plants and producers don’t have to shut in production,” said Robeson. DCP has similar super systems in the Midcontinent and D-J. And in January, DCP signed a long-term gas-supply agreement with Pioneer Natural Resources USA Inc., Reliance Eagleford Upstream Holding LP and Newpek LLC (collectively, the Pioneer JV), under which DCP Midstream will provide a full scope of midstream energy services to handle liquids-rich natural gas from Pioneer JV’s acreage in the Eagle Ford shale play. DCP Midstream also announced plans to construct a sixth plant with 200 million cubic feet per day of capacity in the Eagle Ford.

The bustling Permian Basin is another stronghold for DCP, where developing liquids-rich shale plays are mixing with conventional drilling to boost liquids production. DCP has positions in West Texas as well as Southeast New Mexico, where crude-focused drilling in the Wolfberry oil play and Avalon shale are driving activity. In fall 2010, DCP restarted its Roberts Ranch processing plant in the heart of the Wolfberry trend and is expanding it to 75 million cubic feet of additional capacity. The company is also constructing facilities between West Texas and Southeast New Mexico to link production with low-cost capacity expansion.

“Our system in Southeast New Mexico sits right on top of the Bone Spring area, specifically the Avalon shale—and we are constructing gathering, treating and processing facilities to accommodate up to 100 million cubic feet per day by 2012. We are developing the next phase for the Wolfberry and Avalon to be online by 2013, should producers continue to accelerate drilling,” said Robeson.

Stepped-up drilling in the Permian has led to NGL take-away capacity constraints to the Gulf Coast. And increased NGL production in Southeast New Mexico, West Texas and South Texas has filled up NGL capacity to the fractionators serving the petrochemical and refining industries in the Gulf Coast.

“In the past, capacity constraints hindered growth,” said Robeson.

As producers sought solutions and drilling accelerated, in 2010 DCP proposed an open-access NGL pipeline, named Sandhills, from Reeves County, Texas, with delivery to several markets including Mont Belvieu. It would offer synergies by passing through the Eagle Ford shale, with an expected capacity of 100,000 to 120,000 barrels per day. With the open season completed, DCP is seeking firm commitments and Robeson said interest from shippers has been high.

Price points

Robeson provided comments on the three commodities the company watches most closely: natural gas, crude and NGLs. Currently, the wide crude-to-gas spreads are driving favorable processing economics, she said. As for natural gas, like many in the industry, DCP forecasts that upside remains some time off, tied to a rebound in the economy and additional coal-plant retirements. As for crude oil prices, the company looks for strength in crude over the next few years, with some modest upside possible.

The NGL market is also fairly strong, noted Robeson. The petrochemical industry is the predominant market for NGLs, and currently the U.S. is third in line as a competitor internationally in the cash cost of ethylene. “This bodes well for the U.S. petrochemical industry,” Robeson said.

As supply and demand have rebalanced, NGL prices have recovered.

As for demand, NGLs (primarily ethane) remain the preferred domestic petrochemical feedstock, so the petrochemical industry is converting plants to enable ethane cracking. “A lot of the internationals use heavier naptha-based cracking,” she noted. In December, Dow Chemical announced plans to expand its ethane-cracking capability in the Gulf by 20% to 30%—“this also bodes well for ethane demand.” Ethane-cracking rates are 900,000 barrels per day with increases expected. “Low gas prices favor those chemical companies’ competitiveness, and recovering world and U.S. economies, as well as the export market, will help sustain utilization rates,” she said.

On the supply side, the move toward liquids-rich plays and increased fractionation capacity will in turn boost ethane supplies. Continued domestic consumption and international demand for U.S. propane will pressure propane inventories. “We like the prospects for both ethane and propane demand,” Robeson said.

Taking a closer look at ethane, she noted that ethane and propane make up about 70% of the volume of a standard NGL barrel. “We’ve seen a lot of press about ethane, but from the standpoint of its total economic value of the NGL barrel, it represents about 20% to 25% of the economic value of the NGL barrel, with propane plus the heaviers representing about 75% to 80%.”

Overall, NGL supply and demand fundamentals remain constructive, suggesting continued strength in NGL prices, she said.