Bentek: U.S. Midwest crude oil market will be oversupplied

The U.S. Midwest crude oil market will be oversupplied from plays like the Bakken and Utica during the next five years, creating wide and volatile West Texas Intermediate(WTI)-Brent spreads, according to consulting firm, Bentek Energy.

U.S. Midwest crude oil supply growth of nearly 100% or 808,000 barrels (bbl.) per day, by 2016, combined with inadequate demand growth, will result in oversupply, transportation constraints and deeply depressed prices in the region, according to the company’s recent report, Crude Awakening: Shale Boom Hits Oil Market Alert.

Specifically, Bentek projects the production growth will include increases of 547,000 bbl. per day in the Williston Basin of North Dakota, and about 97,000 bbl. per day in the Anadarko Basin in Oklahoma and Texas, and 131,000 bbl. per day in the Utica shale play in Ohio. Despite these massive supply gains and six announced Midwest refinery expansions, crude oil demand from regional refineries is projected to grow only 3% or 108,000 bbl. per day during this time.

Transportation projects, such as the Seaway and Keystone XL pipelines, are expected to provide only temporary relief to ongoing oversupply conditions, according to the report. Consequently, regional oil prices are projected to remain deeply depressed.

Meanwhile, given increasingly tight and oversupplied Midwest market dynamics, WTI-Brent crude price differentials will average -$14 during the next five years, compared to the current WTI futures discount to Brent (from 2012 to 2016) of roughly -$7.40.

In fact, Bentek forecasts WTI tumbling to a discount of nearly -$18 this year, before rebounding in 2013 and 2014 in response to key pipeline expansions between Cushing, Oklahoma, and the U.S. Gulf Coast, particularly the Seaway Pipeline. Despite these capacity additions, supply growth is expected to substantially outpace pipeline and refinery increases and lead to the return of deep WTI price discounts to Brent in 2015 and 2016.

“Unprecedented increases in Midwest supply and distressed regional prices are leading to a growing incentive to move more crude oil from the Midwest to the Gulf Coast,” notes Bentek senior director of energy analysis, Adam Bedard.

“Over the next five years, oil flows that traditionally moved from the Gulf Coast to Cushing, Oklahoma, and the Midwest will reverse directions and head south, which will lead to major changes in national and regional oil prices. However, due to the massive amount of supply anticipated, pipelines such as Seaway and Keystone XL that are being built to tie these two regions together will only provide temporary relief to low prices at Cushing.”—Jeannie Stell, editor, Midstream Business

EIC Consult: Shale gas dominates onshore, and GOM sees renewed offshore activity

Shale gas production continues to dominate us upstream market and the Gulf of Mexico (GOM) sees renewed offshore activity, according to a recent report from EIC Consult, a trade association for UK companies supplying goods and services to the energy industries.

The report’s findings include a trend showing that offshore drilling and production is bouncing back, post- Macondo, and that U.S. liquefied natural gas (LNG) import terminals will convert to export facilities.

The U.S. shale gas developments, in particular the liquids-rich plays, are “set to enjoy years of growth,” with production estimated to reach 30 billion cubic feet (Bcf) per day by 2020, according to EIC Consult, a market research and consultancy arm of the Energy Industries Council. The report also predicts that, despite much publicized opposition, the comprehensive or prohibitive regulation of shale gas in the future remains unlikely due to the number of jobs created and taxes generated.

Other key findings from the report show that some 5,981 active leases are in the GOM with more than 130 new wells permitted since new regulations came into effect in October 2010.

Also, the rise in shale development has led to LNG exports doubling between 2009 and 2011. However, the report cautioned that the market for U.S. LNG exports is far from secure.

Elsewhere, gas-fired plants are the most likely form of power-generation growth, with natural gas generation likely to increase by 305.81 terawatt-hours per year (TWh), to 1287.62 TWh from 2010 to 2035.

EIC DataStream is tracking 59 future and active gas-fired power plant projects in the U.S., representing more than 44 billion of investment and over 43 gigawatts of generating capacity.

And finally, solar and wind power are leading the way in renewable energy. While there is a need for renewable technologies to become more competitive, when compared with cheap gas, the report predicts that renewables will have an increasingly important role in the future U.S. energy mix.

“In a world of rapidly rising oil prices and reduced imports, developing domestic energy resources, diversifying energy sources and expanding production have become major priorities for the U.S.,” concludes Phil Goddard, director of consultancy and the main author of the report.

“Whether it be shale gas, offshore exploration and production, or renewable sources, such as wind and solar, the U.S. energy sector remains full of opportunities with firms at all stages of the supply chain standing to benefit.” —Jeannie Stell, editor, Midstream Business

FBR Capital Markets: NGL production from shales to double in two years

As a logical outcome of investors and developers reallocating incremental capital away from dry natural gas toward liquids-oriented projects, FBR Capital Markets predicts that U.S. natural gas liquids (NGL) production from shales will increase about 50%, to 658,000 bbl. of oil equivalent per day in 2012 and nearly double to 912,000 bbl. of oil equivalent per day in 2013.

Although chemical companies have been able to absorb the increase in NGL production so far, it remains to be seen if it can absorb another leg of NGL output growth. Also, since October of last year, price realizations for Bakken crude have contracted from a premium of 5% to an average discount of 5% in January, and further weakening to a 14% discount, reports the firm. Given continued Bakken production ramp and ever-increasing Canadian crude output, FBR advises “keeping a keen eye” on the direction of the differentials.

If NGL prices collapse further, the economics of all liquids projects, including the Cana, Eagle Ford, Marcellus and Permian plays will be affected, it reports. —Jeannie Stell, editor, Midstream Business

Ohio Business Journal: Shale boom boosting Youngstown businesses

Local spinoff activity from the Marcellus and Utica shale plays is already substantial, from giving a boost to businesses that struggled to stay afloat not long ago, to landowners depositing newly found wealth from oil and gas leases into area banks, according to a report for the Business Journal in Ohio. And the trend appears to grow, according to members of the Youngstown-Warren, Ohio, Regional Chamber of Commerce.

Area banks are reporting deposits increases from landowners receiving royalty payments and upfront checks for leasing their mineral rights, according to Eric Planey, chamber vice president for international business attraction, who spoke at the chamber's annual economic forecast breakfast, reports the news provider.

Jeff Wagner, senior vice president and chief investment officer for First National Bank, noted that the ripple effect from the shale plays for business is “astronomical.” Companies benefitting from the boom range from trucking and gravel companies to restaurants, he said. "The trickle-down effect is substantial."

Companies adding jobs to the region include V&M Star, TMP IPSKO, Patriot Water Treatment, Dearing Compressor and others. According to the report, between now and 2015 there will be a significant ramp-up in Ohio’s economy, says Wagner, noting that the Mahoning Valley economy has already benefited from the supply chain, and further potential could come from midstream companies, firms moving and transporting the goods, and downstream companies such as construction of ethane cracker plants.

Even if Shell Oil's proposed cracker plant, estimated to cost some $2 billion and create thousands of construction jobs, isn't located in Ohio, the Mahoning Valley is close enough that it will have an impact, Planey says. The abundance of low-cost feedstock could potentially lure operations that previously went offshore. —Jeannie Stell, editor, Midstream Business

ExxonMobil subsidiary XTO Energy plans to drill its first Ohio Utica well

State records show that Exxon Mobil Corp.’s subsidiary, XTO Energy, plans to drill its first Ohio Utica shale well just south of the former Key Ridge Elementary School in Belmont County, state records show, according to The Intelligencer-Wheeling News-Register.

Public records show ExxonMobil has some 52,334 acres leased for drilling in Belmont and Monroe counties in Ohio, while competitor Chevron Corp. has several thousand acres leased in Marshall and Ohio counties.

The Ohio Department of Natural Resources records show XTO has a permit to drill the Utica shale well on a 461-acre plot in Mead Township, just south of Ohio 147. Although XTO has some Ohio permits to drill in other areas of the state, the Belmont County well will be the company's first in the Utica Shale. Industry leaders in Ohio estimate the state's portion of the Utica shale may contain as many as 5.6 billion barrels of oil.

ExxonMobil, which has leased about 26,000 acres in Belmont County since October in the name of XTO, has at least 25,000 acres leased in Monroe County. The leaseold includes including acres found in virtually every area of Belmont County, such as the townships of Richland, Pultney, Colerain, Smith, Washington, Pease, Union, Somerset, Mead, Warren, Wheeling and Flushing.

Also, the Ohio County Clerk's Office show that Chevron took over about 170 individual leases from AB Resources LLC for a total of 4,400 acres, including a 713-acre parcel in the West Liberty area. Most of the acreage is in the northern and central portions of the county, primarily in the areas near West Liberty and Triadelphia. —Jeannie Stell, editor, Midstream Business

Morgan Stanley cuts 2012 gas price forecast by 30%

Recently, Morgan Stanley cut its gas price estimate to an average of $2.70 per million Btus, down from $3.85, for 2012. The main culprit for the cut is U.S. heating demand, which fell to 450 Bcf less than Morgan had previously estimated. The decline means that too much gas went to storage, and gas may be forced onto the market to keep the facilities operational, a so-called ratchet issue, according to the bank.

“Natural gas will likely be range bound between $2.50 and $3 per million Btu for much of 2012, barring any surprises from weather or rig efficiency,” reports the firm. “Extremely mild weather can cause ratchet and congestion issues, sending prices to sub-$2, but this would be short-lived.”

Gas futures have declined 11.3%, now trading at $2.651 per million Btu after dropping to the lowest level in almost 10 years, according to data compiled by Bloomberg. The fuel is the worst-performing commodity on Standard & Poor’s GSCI Spot Index this year.

Gas in storage is at a seasonal record at 3.1 trillion cubic feet, a surplus of 531 Bcf from a year earlier, Morgan Stanley said, citing U.S. Energy Department data. The bank estimated end-October 2011 inventory at 4.15 trillion, a record.

However, gas prices below $2.50 on a sustained basis will prompt utilities to switch from coal to gas-fired facilities, balancing an oversupplied market and eliminating the need to shut production wells, according to the firm. The utilization rate for gas-fired generation in the U.S. averaged around 25% in 2011, even as natural gas prices fell. —Jeannie Stell, editor, Midstream Business

EIA: U.S. pipeline capacity additions well above typical

In 2011, midstream producers added a total of 2,400 miles of natural gas pipeline as part of 25 pipeline construction projects, designed to relieve bottlenecks and help producers move shale play production, according to a recent report by the Energy Information Association (EIA).

These new lines increased total throughput capacity in the U.S. by about 13.7 billion cubic feet (Bcf) per day, which is about the same increase as in 2010 but less than the increase in 2008, which totaled an astonishing 60 Bcf of capacity increase. The growth at that time coincided with major upswings in shale gas production. More than half of this capacity was built as part of the six largest pipeline projects, which represent upwards of 8.2 Bcf, according to the EIA report.

Also, according to the report, “Natural gas pipeline capacity additions in 2011 were well above the 10 Bcf per day levels that were typical from 2001 to 2006, roughly the same as additions in 2007 and 2010, but significantly below capacity additions made in 2008 and 2009.”

The projects underscore the growth of the midstream industry in recent years, as new pipeline projects have been announced throughout the U.S., along with increased rig counts in unconventional shale plays. The U.S. natural gas pipeline network includes more than 200 systems; 305,000 miles of interstate and intrastate pipelines, and more than 1,400 compressor stations, according to the report. The new pipeline projects have been built, in part, to handle production volumes from plays like the Marcellus.

In fact, Pennsylvania’s portion of the play produced some 606.8 Bcf of natural gas from July, 2011 to December, 2011, up from 435.3 Bcf in the first half of the year. That number is also more than twice the levels recorded in the second-half of 2010, according to the EIA report.

Much of the new capacity was built to transport gas between states to hubs and new market areas, which are shifting due to new areas of production. Within the new interstate pipelines, according to the report, five projects, including the Golden Pass, Ruby Pipeline, FGT Phase III, Pascagoula Expansion and Bison Pipeline, added some 80% of the new capacity, representing 6.1 Bcf per day of capacity.

New projects expected to come online in 2012 include the Red River gathering pipeline and the Seaway crude oil pipeline expansion, among others. Capacity expansions in 2012 are also expected to exceed 2011 levels, according to the report. – Meredith Freeman, associate editor, Midstream Business

INGAA: Midstream investment to support 125,000 jobs per year

The need to expand and construct midstream assets that bring natural gas, NGLs, and crude oil to market will support more than 125,000 jobs each year through 2035, a new study shows.

The report, Jobs & Economic Benefits of Midstream Infrastructure Development: U.S. Economic Impacts Through 2035, was conducted by Black & Veatch on behalf of the Interstate Natural Gas Association of America (INGAA). The report found that in addition to the jobs supported, midstream companies will generate nearly $57 billion in federal, state and local tax revenue and will create more than $511 billion in total economic output. The sector will require an estimated $200 billion in additional investments to build out the infrastructure through 2035.

“This study demonstrates the importance of midstream infrastructure in terms of jobs and economic benefits,” says INGAA Foundation president and chief executive, Don Santa. Many of these new jobs are in management and skilled operations, which are generally higher paying compared with average national wages, the study found.

The study does not analyze the economic impact from upstream activities nor does it analyze the impact on households and manufacturers that will benefit from lower natural gas, oil and NGL prices.

The study projected capital requirements for North American natural gas, NGLs and oil midstream infrastructure, which includes mainlines, laterals, processing, storage, compression and gathering lines. Natural gas midstream represents 83% of the additional investments, while oil represents 10% and NGLs represent about 7%.

As a result of the expected investment projections, natural gas is expected to generate more jobs than oil and NGLs.

—Keefe Borden, senior editor, Midstream Business