The gas midstream industry faces two interesting challenges – the increasing abundance of economic gas production, even at lower forecasted sales prices, and the continued pressure on crude oil prices. Our recently completed long-term forecast of gas plant volumes and potential NGL supply highlights the risk factors in making investment decisions about gathering, processing plant, and NGL assets.
The most important risk is volume – as the world retreats to a risk-averse stance in negotiating midstream fees, the most important metric in assessing future value for midstream assets is the prospect of future volume growth. When looking at assets designed to handle gas and NGLs, not all gas molecules look alike. The projected NGL content of the gas determines how much of it must be moved through a gas plant to create the ‘dry’, or residue, gas required by the market. NGL content also determines how much NGL is likely to be produced in a region, and how much ethane will ultimately be recovered. This, in turn, drives the amount of throughput that can be expected for NGL pipelines, fractionators, and, ultimately, export terminals as these barrels seek a market.
The primary metric to assess likely volume growth is knowing the type of gas expected to be produced. So-called “associated” gas, which is gas that is produced as part of an oil play, has high NGL content per unit of production. It means that more of it has to be processed to deliver the amount of ‘dry’ gas required by the end market. This is due to the ‘shrink’ in gas volume that results from removing liquids for sale as NGLs.
Much of the future demand growth for US gas is expected to be concentrated in the US Southeastern and Gulf Coast regions, where it will feed chemical plants, power generators, LNG export terminals, and the Mexican market. Associated gas produced in this region has a cost advantage in being closer to the end user as well as having higher NGL content, which helps lower the producer’s breakeven cost.
A recovery in crude prices would be expected to support ongoing growth in associated gas production. In turn, this would increase the need for gas processing capacity and NGL handling facilities in these areas and support throughput growth for current capacity. However, a conservative crude case that reduces the expected average price for WTI longer term introduces risks to that investment thesis. With lower crude prices providing less support for the development of oil plays, the incremental supply needed by the gas market would tend to come from plays with lower NGL content. Less total gas would require processing for NGL extraction to produce the same volume of dry gas for sale.
The following figures illustrate the difference in the impact that oil prices could have on the amount of associated gas production available for processing.
In the higher crude price case, the amount of associated gas in the processing stream is forecast to be as high as 48% by the time overall associated gas production peaks in 2026.
Ultimately, as with other types of real estate, the message for prospective midstream investors is “location, location, location”. And, as always, an opinion on where future growth is will be key to a good deal. More than ever – even when the focus is on gas – crude price matters.
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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