Recently, Superior Pipeline Co. LLC celebrated its 15th year of leadership in the midstream sector. Its first office opened in Tulsa, Oklahoma, and today the Unit Corp.-owned company runs a second office in Canonsburg, Pennsylvania, to focus on its Appalachian Basin assets. Altogether, the company has grown to employ some 85 people to conduct its business of buying, selling, gathering, transporting, processing and treating natural gas. Superior currently owns and operates three natural-gas-treatment plants, 10 gas-processing plants and thirty-four active gathering systems with about 860 miles of pipeline in Oklahoma, Texas and Kansas.

“Gas processing is as prolific right now as I’ve ever seen it in my 33-year career.”

MIDSTREAM: Congratulations on your 15-year anniversary.

PARKS: Thank you. That's right, we incorporated in June of 1996.

MIDSTREAM: So, after experiencing many of the cycles of the industry, what do you think about the current low price of gas?

PARKS: I don't disagree with what appears to be the consensus, which is that there is enough drilling activity going on, even for dry gas, that it would appear that gas prices are going to be soft for the foreseeable future. But one of the issues that I have not gotten my arms around yet is the fact that, with most of the producers now drilling for rich gas, if they are drilling for gas at all, and not crude, that rich-gas is processed, which shrinks the stream by about 30% to 40% of the Btus in the gas. From an analytical standpoint, despite the prolific rich-gas wells, there should be less gas going into the pipeline to satisfy demand. We end up with a growing supply of Btus, but with less dry gas, or methane, going into typical dry-gas demand centers. I would suggest there is an analytical exercise for someone to figure out at what point the supply drop of dry-gas Btus will encourage higher methane prices, because that might be a little quicker than some might otherwise expect.

MIDSTREAM: So the typical rig-count-equals-gas-supply scenario might be a little off?

PARKS: Right. While some operators are drilling to hold acreage, most of those who can are moving into the wet-gas areas. And most analysts calculate that, for example, a thousand rigs drilling for gas, with ever more successful wells, would result in gas supply increasing faster than demand. But we need to start accounting for gas-volume shrinkage resulting from processing. What if, in 2013 total gas supply grows by 5%, yet we end up with a methane shortage at the Chicago city gate in January 2014. Of course, gas in storage will be the canary in the mine, indicating an impending problem, but it still may arrive sooner than the consensus expects.

MIDSTREAM: That is an interesting, albeit slightly scary, question.

PARKS: It is. And the demand for even more new natural gas processing plants is tremendous. There are some areas, such as in the Permian Basin and in the Eagle Ford, where there are lots of big, older plants, but this voluminous amount of rich-gas that is being discovered and produced is requiring that much more capacity be built. Elsewhere there are areas, such as in the Marcellus shale in southwestern Pennsylvania and the Utica shale in eastern Ohio, where there are no plants, have never been plants, and suddenly we need big plants.

MIDSTREAM: Do you think there might be a natural gas liquids (NGLs) glut and price depression heading our way?

PARKS: Not really. NGL prices are obviously tracking crude. As long as crude stays somewhat elevated, then the heavier end of the NGL barrel will stay elevated. The lighter ends, like ethane, are cheaper than oil-derived naphtha, and ethane should stay more or less elevated due to its price advantage over naphtha. If crude oil prices fall, so will the NGLs, but I think it is more likely that crude will rise to $110 per barrel than fall to $50, long term.

MIDSTREAM: Then, are we headed for too much gas-processing capacity?

PARKS: Probably not. Gas processing is as prolific right now as I've ever seen it in my 33-year career. Frankly, I'm stunned. The economics for processing are very good for both the producer and the processor, and yet, the worldwide economy and the national U.S. economy are weak, at best, or in recession. So, if the demand for NGLs, which is typically economy-driven, is strong now, how good would it be if the national and global economies were growing at 3% to 5% per year? Seems to me there is more upside, in the long term, for the NGLs, due to the nature of the worldwide economy.

MIDSTREAM: It all sounds good, then.

PARKS: Well, not so fast. Understand that China is still soaking up both crude oil and ethane-derivative products, which we export. Much of the underpinnings to the ethane demand and price are due to those exports. It is a bit of a mystery to understand how ethane can be doing so well with the worldwide economy being so flat. If China slows down dramatically, we may have a problem. China's demand is apparently driving demand for ethane and its derivatives, leading to announcements of new ethane-based petrochemical plants taking advantage of increasing supplies of domestic ethane from rich gas production. That's probably the linchpin in the supply-price balance for ethane currently. The heavies are going to continue to follow crude.

MIDSTREAM: Do you see other challenges ahead for the midstream sector?

PARKS: Yes, but capital is not a problem. There is more money out there chasing midstream opportunities than one can ever imagine. Our number-one problem right now is labor. It doesn't make any difference whether the work is in Pennsylvania, Oklahoma or North Dakota. The ability to find experienced engineers and operators to hire is becoming increasingly difficult, and the whole industry is strained. The problem dominos outward from there, because contractors have to find people, as well, to design and build the plants.

MIDSTREAM: And problem number two?

PARKS: Delivery of equipment. For example, it wasn't too long ago that a company could get a new gas-processing plant ordered, designed, fabricated and delivered onsite in about nine months. Then it took three or four months to install it. So, within about a year, it could go from start to finish. Now, it is difficult to get anything delivered in less than 13 months, and it takes about another six months to install, so that is about 18 to 20 months, approaching two years. Be it a plant or a pipeline, the equipment availability isn't as quick as it was in the past. All that means delays of operational capabilities.

MIDSTREAM: What about equipment costs and rights-of-way?

PARKS: Actually, equipment costs are not running out of control for now. Although they are slightly elevated, we are not being squeezed. That might be a function of the economy because, as an industry, we are not competing with other industries for steel. On the other hand, rights-of-way cost more than they used to and it takes longer to get it done. The landowners have become more sophisticated in negotiations, and many want their attorney to look at the documents, so that part takes longer. With the current high level of activity, getting those rights is becoming more costly and time consuming.

MIDSTREAM: Where are the next areas of opportunity for Superior Pipeline?

PARKS: We at Superior are somewhat attracted to the Bakken shale area, and dedicated some effort to establishing a position there. We are interested in the Niobrara area as well. The Utica is interesting, because we have an office in Pittsburgh, and are active in Pennsylvania and West Virginia. To the extent that we would have to shift our attention just a little further west to be into Ohio, that has potential.

MIDSTREAM: Why are those particular areas of interest?

PARKS: In general, Superior has expertise in constructing and operating gas-processing plants, so we are very attracted to rich-gas areas where new processing plants are in demand. Also, we have a very solid presence in the Midcontinent and a growing presence in the Marcellus shale-Appalachian Basin, but we would like to have a third leg on our stool, and that could be the Bakken and Niobrara.

MIDSTREAM: Going forward, do you think your company could be acquired by a larger player?

PARKS: Not really. We are a subsidiary of Unit Corp., so it would be problematical for anyone to buy Superior. They would be dealing with a parent company which is ostensibly quite happy with what we are doing.

MIDSTREAM: Where do you see Superior in five years, such as in size or core operations?

PARKS: Since Superior became a subsidiary of Unit in mid-summer 2004, we have grown by almost a factor of 10 in asset size. Can we continue to grow at a 40% growth rate for the next five years? It is possible, but not probable, especially in light of the current environment of staffing and equipment-delivery issues, and the fact that we are construction-oriented. We are not a growth-by-acquisition company, by nature. We prefer to engage in greenfield construction projects and continuing that growth rate with only greenfield construction would be difficult. Do we intend to continue to grow at a very fast rate? The answer is yes.

MIDSTREAM: What would be a reasonable estimate of your targeted growth rate?

PARKS: In three to four years, I can see us being three times as big as we are today, just by doing what we are doing. I don't see us getting spun off or forming a master limited partnership (MLP) because our parent company has a low-leveraged balance sheet and can finance us to sustain that growth rate by Superior. Today, Unit Corp.'s debt is $250 million and its equity is $1.8 billion. If the financing capability became strained at our parent level, and we could still economically justify pursuing available projects, then we would look at bringing in partners, be it industry partners or equity partners, or perhaps form an MLP to help sustain the financing for the growth.

MIDSTREAM: What will you do to keep the talent needed to achieve that growth?

PARKS: We tell our employees, particularly the younger ones, that this is the most exciting time in the history of our business: I've never seen it like this. The younger ones that have been with us only about five years, or those just out of school, they might think it has always been like this. Although one could reasonably expect it won't stay like this forever, this still being a cyclical industry, we want to be sure they understand that this is definitely a growing industry. Specifically, we are able to provide career opportunities that are substantially advanced relative to our employees' experience level, and given our growth rate and financial success, to reward them accordingly.

MIDSTREAM: What can the industry do to try to keep up this activity for as long as possible?

PARKS: There is a recognition today, due to the revolution in shale gas and shale oil exploration, that the U.S. can grow the domestic supply of both products. When ExxonMobil, Shell and Chevron start coming back, domestically, to drill for natural gas and oil, you know something is up. That suggests a shift from the past 30 years, and if that continues, this industry will stay active. So any young person with an accounting, engineering or related type of degree should figure out a way to go to work in this industry, because there appears to be nothing but long-term upside for natural gas and crude oil drilling. No one has drilled for crude oil in the U.S., in a big way, since the 1970s. And yet, here are major players, both large independants and the integrated oils, drilling for crude oil in North Dakota, the Eagle Ford and in the Permian Basin. This is something that no one under 60 years old has ever seen happen. It's a sea change.