Marcellus Midstream 2011: Petrochems urged to build near Marcellus shale

Appalachian Basin production is set to rise dramatically as more Marcellus shale wells are drilled in Pennsylvania, speakers said at Hart Energy’s Marcellus Midstream Conference in Pittsburgh.

Some 2,300 shale wells have been drilled so far in Pennsylvania, according to officials, and the estimated resource, as much as 260 trillion cubic feet of recoverable gas, could make the play the second-largest gas field in the world after fields in Qatar.

“If I were running a petrochemical company today, I’d be looking at this part of the county, maybe locating somewhere along the Ohio River,” said Gary Evans, chairman, president and chief executive of Magnum Hunter Resources Corp., which plans to drill 15 horizontal Marcellus wells in 2011.

“There’s going to be a lot of natural gas. The U.S. has created a whole new natural gas industry and we can compete with anyone else in the world on petrochemicals, even China. We are working on a 200-year feedstock supply, the way things are going,” Evans said.

Evans conceded the petrochemical industry does not move as fast as the E&P and midstream sectors of the energy industry do, but he believes that once petrochemical executives see the level of ethane that can be produced, “they’ll put their thinking hats on,” he said. “It is a changing world out there and there will be new and better deals cut.”

Meanwhile, Kinder Morgan Products Pipeline is developing the Marcellus Lateral Pipeline, a 248-mile line that will connect to the company’s Cochin Pipeline that transports propane from Alberta’s gas fields to Sarnia, location of several olefins crackers that can use either ethane or naphtha as feedstock. Naphtha is a derivative of crude. At today’s commodity prices, ethane derived from natural gas is less expensive.

“Why would ethane travel from the Marcellus to the U.S. Gulf Coast when other shales are closer? The ethane is needed in Sarnia where those crackers can use it year-round,” said Karen Kabin, director of business development for Kinder Morgan Products Pipelines.

— Leslie Haines, editor-in-chief, Oil and Gas Investor

Marcellus Midstream: Range and MarkWest “joined at the hip”

Range Resources was the early pioneer in the modern Marcellus shale play in the Appalachian Basin, and today it enjoys an enviable position. Of its 1.3 million acres in the basin, it considers a whopping 700,000 acres prospective for the Marcellus, said John Pinkerton, chairman and chief executive of Fort Worth-based Range Resources Corp., speaking at Hart Energy’s Marcellus Midstream conference in Pittsburgh.

Range had deep roots in Appalachia, and its resources included an extensive database of existing well data and years of operating experience. Early on, one of its focus areas was the liquids-rich side of the play, centered on Washington County in southwestern Pennsylvania.

To develop this side of the emerging play, Range was interested in forging a relationship with a gas processor. “We really liked the wet part of the play because of the superior economics, but we had limited capital. We also had a pretty good view of what we were good at and not good at,” said Pinkerton. The firm had handled some midstream projects internally, and was well aware of the demands of that complex sector, and was looking for a partner.

Enter MarkWest Energy. The Denver-based gas processor had been active in the Appalachian Basin for years, and had extensive local experience in processing and marketing of natural gas liquids.

“Being able to capture value from liquids is the sweet spot for us,” said Frank Semple, MarkWest chairman, president and chief executive. Pinkerton and Semple participated in a Fireside Chat at the conference, which attracted more than 1,400 attendees.

“Even though it’s not a formal joint venture, it operates like one,” said Pinkerton. “Trust is crucial. We had to have confidence that our information would be kept confidential, and we trusted MarkWest.”

The two firms work in close coordination. “We are joined at the hip with the Range team,” said Semple. The partners hold frequent meetings, from weekly gatherings for technical staffs to quarterly discussions among senior management.

Today, the Marcellus continues to expand at a rapid clip. Production across the entire play has reached 2.5 billion cubic feet (Bcf) per day, and conservative estimates call for volumes in the neighborhood of 8 Bcf a day by 2020.

Certainly, staying abreast of producers’ drilling programs is a daunting challenge for the midstream sector. “The play is bigger than anyone thought,” said Pinkerton. Range has sold assets and marshaled its capital to concentrate on the Marcellus; from one person in 2007, it now employs 350 people in Pennsylvania. “Last month, we hired 28 people, all from the state of Pennsylvania,” he said.

Now, early indications are that other shales and tight sands in the Appalachian Basin could be productive if horizontal drilling and multistage fracture treatments are applied. Range has already drilled test wells in the Utica and Upper Devonian that are encouraging. “We’re just in the initial innings,” said Semple.

— Peggy Williams, director e-content, Hart Energy

CERAWeek 2011: Natural gas will change utility business in this decade

Natural gas is the “one single thing” that will change the electric-power industry most in this decade, and will help ensure the U.S. has plenty of electricity, John Rowe, chairman and chief executive of Chicago utility Exelon Corp., told CERAWeek 2011 attendees in March.

“There are a few things we can say are very good, and increasing domestic supplies of natural gas is one of them. Natural gas is already affecting the transition to clean energy. This is revolutionary for the economics of our business.”

Rowe is the senior-most electric utility executive in the nation, having served as the leading executive of a utility since 1984. As such, he has seen the natural gas picture change often.

“In my 27 years in this industry, I’ve seen gas be a scarce commodity that costs a lot, and I’ve seen it be plentiful, but I’ve never seen the degree of consistency we have now in the estimates of supply we see today—and for decades to come—at an affordable price. I didn’t believe in using alternative fuels until I saw this shale gas.”

Rowe said utilities recognize that gas emits less pollution than coal and is a cheaper feedstock than other alternative fuels. Yet, its history of price volatility does give him and other utility executives cause for concern, he said.

Exelon, one the largest U.S. utilities, operates 17 nuclear power plants and uses coal and gas. It is already half-way toward its pledge of cutting its carbon footprint to essentially neutral by 2020.

Rowe said some 18 companies have announced plans to mothball older coal-fired power plants, and recently Southern Co. reported in its 10-K that it is reconsidering its mothball plans.“That is like the Vatican shifting,” Rowe joked.

“Natural gas is the queen, and she allows us to compete with China and India on power plants. I believe in the infrastructure that the utility industry represents. It is, to me, a great service. Central-station generation on a large scale must remain the main source of power. But gas is queen for at least another decade or two. Then what comes next? Maybe it is time for a nuclear renaissance. I give it a 50-50 chance.”

— Leslie Haines, editor-in-chief, Oil and Gas Investor

Middle Eastern turmoil could push oil prices to $200

The Middle Eastern turmoil could lead to an oil price of more than $200 per barrel, according to the recently released Este Special Oil Report. Este Group is a financial provider in Central and Eastern Europe.

“The greatest factor of insecurity is the political developments in a number of Arab states. At present, this is by no means fully priced in yet. I do not expect the situation to calm any time soon,” says Ronald Stöferle, commodities analyst at Erste Group.

Apart from the chaotic situation in Libya, the conditions are becoming worse every day in the major oil-producing countries; therefore a domino effect cannot be ruled out, he notes. The latent social tensions should not be underestimated. The rising oil price is fueling discontent and is driving inflation even higher. Should there be more oil production outages in Libya or Algeria, even if only short-lived, this would de facto exhaust reserve capacities in Saudi Arabia. Moreover, Libyan oil has less sulphur content and is lighter than Saudi oil, and for this reason, it cannot be replaced without problems. Saudi Arabia carries the greatest risk of triggering a steep oil-price rise.

On the one hand, there are doubts that Saudi Arabia would be able to expand capacities fast enough should worse comes to worst, and on the other hand, the latent risk of a blockade of the most important oil transport routes (Strait of Hormuz and Malacca) exists, notes the analyst. If bottlenecks were to occur on either of the two routes, the oil price would rise to more than $200 per barrel.

Will higher oil prices cause the next recession? “The high price of oil is definitely a threat to economic growth,” comments Stöferle. As soon as the price per barrel of crude rises above $100 for an extended period, it may be assumed that OPEC will drastically expand extraction to avoid throttling the economy. “Therefore, we believe that most risks are upside for the oil price.”

Even if supply to the market is not yet sufficient, the bush fire of revolution in the Middle East could spread further and drive the oil price to new highs, especially in the first half of the year. Erste Group Research analysts expect an average price of $124 per barrel of Brent in 2011. A rule of thumb states that a 10% oil price increase lowers gross domestic product (GDP) of the U.S. economy by around 25 basis points.

According to the International Energy Agency, the share of spending on oil in 2010 was 4.1% of global GDP. Should the price stay above $100 in 2011, the ratio would rise to almost 5%, which represents a critical level for the economy. At an average price of $120 per barrel of Brent, this would mean 6% of GDP, and at $150 the share would increase to 7.5% of GDP. As it is clear that OPEC wants to keep the economy going in any case, in such a scenario it may be assumed that production will be increased, according to the Erste report.

The economic stimulus measures taken by governments and central banks throughout the world and the zero-interest policy on an almost global scale were behind the continued rise in commodities in 2010. Therefore, the further development of the oil price depends heavily on whether a third quantitative easing program will be implemented by the Federal Reserve Board. The Fed has stressed the positive effects of higher stock prices many times. Commodities also profit from higher risk tolerance.

“The very high positive correlation of the stock market and the oil price can hardly be explained by conventional supply and demand patterns. Monetary policy has probably become the most important factor for commodity markets,” says Stöferle.

Furthermore, the years before elections have always been positive for the U.S. stock market. Since the correlation between U.S. stocks and the oil price is stronger than ever this year, the environment for oil prices is expected to be positive.

Meanwhile, peak oil could lead to stepped up shale-gas exploration, with extraction in Poland and Ukraine. “We will soon reach the maximum rate of oil extraction for conventional oil,” notes Stöferle. “There is no doubt that the discussions regarding peak oil are more than just about spreading panic.”

About 64 countries have already reached their sustainable maximum rate of oil extraction. Natural gas, especially shale gas, will become the fastest-growing fossil fuel of the future, in the view of Erste Group analysts. As it burns cleaner than coal or petroleum and also has advantages with respect to CO2 emission caps, natural gas can easily replace oil.

Over the coming three to five years, prices are expected to be in the range of at least $7 to $10 per MMBtu. “The extraction of shale-gas reserves in Europe will gain enormous significance,” forecasts Stöferle.

Lively exploration and acquisition activities, especially in Poland and Ukraine, are expected in the coming years. China also plans to more than double the share of gas in the coming decade. At present, 80% of energy demand is covered by coal, while gas only covers 1%. Unconventional gas is expected to play an important role and, by 2020, should cover 30% of China’s gas needs. In this sense, the Erste analysts view gas—above all, shale gas—as one of the most attractive investment options in the energy sector.

— Imre Varga, consultant, Grayling Ltd.

CERAWeek: Integrated solutions required to meet energy needs

Although oil and gas will be the primary energy sources in the coming decades, all types of energy, including renewables and nuclear, will be part of the solution to meeting global energy demand.

At the Global Oil Plenary discussion during day one of CERAWeek in Houston on March 8, Farouk Al-Zanki, chief executive and deputy chairman of the board of directors of Kuwait Petroleum Corp. (KPC), said the challenges that lie ahead for oil companies are great.

Technology will pave the way, he said, and technology advancements will take place more rapidly through cooperative efforts. Partnerships between national oil companies (NOCs) and international oil companies (IOCs) will expedite technology development and transfer. “We need to work together to manage and increase production,” Al-Zanki said.

That goal will require more than cooperative efforts. It also will require investment. Toward that end, KPC has an ambitious plan that will include $270 billion in investment toward not only new technology, but also recruiting and training personnel. “People are needed also,” he said.

John Hess, chairman and chief executive of Hess Corp., brought the discussion of energy demand closer to home for Americans with his assertion that the need to meet domestic energy demand is one of the primary reasons for the need for a U.S. energy policy.

“To sustain our economic growth and prosperity, we need a comprehensive long-term approach to energy,” he said. As with any challenge, the objective is much more easily defined than achieved. “There is tremendous confusion regarding energy policy,” Hess said, “and there is no one simple solution.”

Current conditions in the Middle East have underscored the need for energy security. These disruptions are a reminder, he said. “The U.S. has an obligation to act globally by setting an example here at home.”

According to Hess, an energy crisis is coming, and it is likely to be triggered by oil. “While we are not running out of oil…we are not investing enough to grow production capacity to keep up with demand.”

The first step toward meeting energy needs is thrift. “First efforts should be on energy efficiency,” Hess said, “but as we moderate demand for oil, we must do all we can to increase supply.”

In the U.S., increasing supply will require the government to encourage activity in the Gulf of Mexico. “The Gulf of Mexico is essential to the nation’s energy security,” Hess said. “We need to get our offshore drilling industry going again.”

Although it might be good politics to target oil and gas companies, it is not good policy, he said. “It serves nobody’s purpose for our political leadership to vilify oil producers. Our country needs to do everything it can to encourage more drilling to strengthen our energy security, including proper regulatory oversight to ensure protection of the environment.”

With enormous domestic demand, it is a good thing U.S. energy security does not have to rely solely on U.S. production. Canadian oil also will be part of the solution, and a fair amount of Canadian oil originates in Alberta.

Bruce March, chairman, president and chief executive of Imperial Oil, said about half of the oil exported to the U.S. from Canada comes from the oil sands.

While the oil sands hold enormous reserves—170 billion barrels of recoverable reserves—concerns exist about the environmental impact of the oil sands and the cost required to produce oil.

According to March, many of these concerns are a result of public misperceptions, particularly in terms of greenhouse-gas emissions (GHG) and water requirements. “GHG is the most misunderstood element of oil-sands production,” he said.

“Oil-sands crude imported to the U.S. on a well-to-wheels basis is only 6% higher in GHG emissions than average traditional oil production in the U.S.,” March said, noting that GHG emissions from oil-sands production have been reduced by 40% since 1990. And there is an ongoing commitment to further reduce emissions, he said.

Water reuse has gone up considerably as well. “About 80% to 90% of water used is recycled,” March said, and Imperial Oil is continuing to look for ways to reduce freshwater consumption. Between $60- and $80 million in research has been devoted to developing innovative oil-sands technologies, and Canada’s oil-sands developers have joined in a technology-sharing agreement to expedite new technology application in the field.

In one of the newest oil-sands developments at Curl Lake, technologies are being applied that will significantly reduce GHG emissions. “This will be the first mining operation where bitumen will be processed once in a downstream refinery instead of being processed twice,” March said. The process will yield GHG emissions that are comparable to those being produced by conventional oil production operations out in the U.S. today.

“We have a track record that we can be very proud of,” March said. “We know we have a positive story to tell.”

— Judy Murray, editor, E&P

Midstream companies set records driven by NGLs, expansions, acquisitions

Midstream energy companies celebrated record successes in the first-quarter of 2011, driven by natural gas liquids (NGLs) margins, new expansions, increased pipeline throughputs and other favorable operations. While not all midstream companies prospered, MarkWest Energy, Atlas Pipeline, Energy Transfer and Noble Energy were among the winners.

In February, MarkWest Energy Partners LP reported record-setting distributable cash flow of $69.1 million for the three months ended December 31, 2010, and $241.1 million for the year ended December 31, 2010. The distributions set a record high compared to any quarter in MarkWest’s history, which began in 2002. Also, the partnership reported adjusted EBITDA of $88.2 million for the three months ended December 31, 2010, and $333.1 million for the year ended December 31, 2010.

Commodity prices and NGL fractionation-margin spreads contributed to its success, but the biggest driver was MarkWest’s Marcellus shale-play asset, the Liberty Pipeline System, according to a company spokesperson.

To further capitalize on the Marcellus region, MarkWest Liberty, a partnership between MarkWest and The Energy & Minerals Group, recently announced the development of a gas-processing plant near EQT Corp.’s Logansport compressor station in Wetzel County, West Virginia. MarkWest Liberty will construct a 120-million-cubic-feet-per-day (MMcf/d) cryogenic gas-processing facility and associated NGL pipeline by mid-2012 to process rich gas transported in EQT’s Equitrans pipeline. The NGLs recovered at the plant will be transported via a newly constructed pipeline to MarkWest Liberty’s fractionation, storage and marketing complex in Houston, Pennsylvania.

On January 19, MarkWest Liberty announced the execution of a long-term agreement with Chesapeake Energy Corp. to provide additional midstream services for Chesapeake’s substantial rich-gas Marcellus acreage in northern West Virginia. MarkWest Liberty will provide the midstream services at its Majorsville, West Virginia, processing complex, which includes a 135-MMcf/d cryogenic gas-processing plant that is operating near capacity and a second 135-MMcf/d cryogenic plant that is under construction and nearing completion. The NGLs recovered at Majorsville are transported via pipeline to MarkWest Liberty’s Houston complex.

Elsewhere, on March 1, Atlas Pipeline Holdings LP, now operating under the name Atlas Energy LP, hit a 52-week high as it traded at $17 compared with its previous 52-week high of $16.68. Part of its success is attributed to the February 2011 transaction whereby Atlas Energy Inc. was acquired by Chevron Corp. for $4.3 billion. Atlas Energy Inc. now no longer trades as a public company. Atlas Energy LP continues to trade on the New York Stock Exchange under the ticker AHD. Concurrently with the Chevron/Atlas acquisition, AHD acquired gas-producing assets from Atlas as well as its syndicated drilling partnership business.

Similar to Atlas’ strong showing, Energy Transfer Partners LP hit a new 52-week high on March 1, trading at $55.50 compared with its previous 52-week high of $54.95. Energy Transfer recently entered into multiple long-term agreements with shippers to provide additional transportation services from the Eagle Ford shale play in South Texas. To facilitate the agreements, Energy Transfer plans to spend some $300 million constructing a gas pipeline, processing plant and additional facilities. These projects will expand the company’s midstream infrastructure there, which includes its recently completed Dos Hermanas Pipeline and its Chisholm Pipeline scheduled for completion in second-quarter 2011.

Also, shares of Noble Energy Inc. reached a new 52-week high on Feb. 28. The stock traded as high as $92 during mid-day trading, finishing at $91.72. Although the company is primarily known for its domestic and international upstream operations, it also owns gathering systems and processing facilities that support its gas, oil and NGL production.

— Jeannie Stell

Oil supply shock: This time it really is different—mostly

The loss of significant volumes of oil supply from Libya, a major energy exporter, has caused anxiety in global consumers, but not the alarm and dread that resulted from oil-supply disruptions in the 1970s, when consumers feared actual shortages and panicked.

The disruptions of the 1970s were much larger than today’s Libyan outage, but credit for the current relative calm is due to the development of institutional and international cooperative efforts and more information, concludes Bhushan Bahree, IHS CERA senior director for OPEC and the Middle East, in a recent report.

Today, there is “clear operational understanding” between members of the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC), he says.

“These channels of communication have been built and road-tested over more than three decades. This time, it really is different—to an extent.”

Bahree points to oil inventories, spare capacity, intervention processes and oil-futures markets that can save consumers from oil-price shocks in the coming months.

First, major consumers such as China have built up large inventories of oil that can be released to markets in the event of a supply disruption. In fact, according to Bahree, the U.S. alone has more than 700 million barrels in storage.

Second, IEA members have more than 4 billion barrels of public and industry stocks.

“Saudi Arabia maintains strategic spare capacity. The kingdom has a stated policy of maintaining 1.5- to 2 million barrels a day of spare crude output capacity that can be quickly brought into use to offset a disruption elsewhere,” he says. “It has even greater spare capacity currently because of an expansion program undertaken when demand was soaring in the past decade.”

Third, the IEA and OPEC have “an understanding” on sequential intervention, states Bahree.

“Both organizations have matured since the 1970s, when the IEA was a fledgling meant to counter OPEC, and OPEC was full of nationalist fervor at a time of North-South confrontation. A thaw that started after the first Gulf War resulted in increasing dialogue between the two culminating in the establishment of the International Energy Forum.”

The thaw led to a “gentleman’s agreement” on supply intervention, which was tested when the U.S. and its allies invaded Iraq in 2003. The IEA can follow up with a release of strategic stocks held by its members if necessary—that is, if OPEC is unable to fill a supply gap.

Finally, futures markets “are a critical balancing factor,” he reports. In the 1970s, oil was not traded on futures exchanges, but as trading and liquidity built up during the 1980s and 1990s, futures markets “have come to play a critical role in instantly pricing risk.”

Even without such procedures to deal with a sudden drop in oil supply, a run-up in prices can quickly dampen demand to align it with available supply, although price volatility during adjustment phases “can be unnerving,” notes Bahree.

“None of the above means that the world is protected against every oil-supply threat. A disruption in excess of the ability of the mechanisms in place to cope with a physical disruption could still occur. But the defense mechanisms have worked during Venezuelan strikes in 2002 and 2003, the Iraq war in 2003, and Nigerian supply woes related to political troubles. Now Saudi Arabia has stepped in smoothly to offset supply losses resulting from the violence and political upheaval in Libya. Others in OPEC, notably in the Gulf, may also help. The IEA is standing by to assist, if needed, with more oil. This is not 1979.”

— Jeannie Stell