CONTINUED growth in natural gas liquids supply—driven by the shale play and tight oil—should provide more opportunities for storage and logistics buildouts, according to Anne Keller, manager of NGL Research at Wood Mackenzie.
Keller said most of the growth forecast is concentrated in two states—Texas (Eagle Ford) and North Dakota (Bakken)—with Niobrara (in Colorado and Wyoming) coming on in future years, albeit with lesser production. She spoke during the International Liquid Terminals Association’s 2013 International Operating Conference June 3 and 4 in Houston, Texas.
“There is a lot of opportunity,” she said. “In the fourth quarter, we’re still showing normal growth. As supply grows and there are ways to get it to market and ways to get it offshore, there are more opportunities in storage. Like a lot of others, you’ve seen growth. Growth is beginning in the Rocky Mountain region, with increased activity and drilling, but the growth rate won’t be as big as in other areas. You can only frack what’s there. You can only get out what’s there.
“Attractive forward economics in Canada point to massive production potential, in spite of what you’ve probably seen and read about the challenges they’re facing. In spite of the fact that they’re constrained in building pipelines to the coast in Canada, the outlook for them is still continued growth in a long-term view.”
In refined products, advantaged costs made North America the most profitable in 2012.
“It’s not necessarily almost up to the golden age where we were five or six years ago, but it’s really not bad,” she said. “We have the great advantage of light, sweet crude, giving refiners a new lease on life. There is the challenge of having to expand your swing storage capabilities to handle intermediate products and move this stuff around to different markets. We’re seeing some congestion, even in Houston. In some cases, we’re seeing some bottlenecks here. But right now, the outlook is for profits, and that translates into money for refiners to do what they need to do.”
Keller said demand for oil-based motor gasoline peaked in 2007, and it doesn’t look like there will be a return to the yearly growth pattern of 1% to 1.5% that was present every year up until the recession. After that, Keller said we’ve seen reductions in miles driven, increases in required fuel economy, and increased use of renewables and gas-based fuels that have combined to put more pressure on gasoline demand in the future.
A 2011 study showed a change that seems to be permanent in the habits of the American population.
“Before 2011, gasoline prices would get high and we’d go to smaller cars,” she said. “Then prices would go down and we’d get back to SUVs. But in 2011, the study showed younger people—teenagers and 20-somethings—are not driving as much. In addition, the Boomer generation is getting to the point where they’re trading in their SUVs. It looks like gas is stuck in the $3-$4 range permanently.”
Exports are increasingly important. As markets grow and domestic supply falls, Mexico, Latin America, and South America are a growing target market for US gasoline exports.
“These markets currently don’t require low sulfur ‘Eurospec’ gasoline—similar to the Tier 3 requirements the US EPA is proposing be adopted,” she said.
Keller said North America emerges as a significant exporter as naphtha is backed out of the domestic market by increasing NGL supply, resurgent light sweet tight oil supply, and declining gasoline demand.
“Asia’s large naphtha deficit grows due to strong demand growth for basic petrochemicals,” she said. “The Middle East naphtha surplus grows slightly due to new refinery investments. Europe’s naphtha deficit grows, as refinery runs are cut, but LPG may displace naphtha in this market if the US surplus continues to grow.”
In her natural gas and NGLs supply outlook, she said operators are allocating capital across many plays, and a lot of activity is occurring on multiple fronts:
• Marcellus NEPA.There is strong development with upside and improved rig and well performance.
• Utica.The development pace is increasing and play economics will benefit from high NGL yields.
• Mississippian.Leading low-cost resource with high gas rates (50% gas) are adding gas and NGLs to saturated markets.
• Haynesville.There is reduced development, a small core area, and declining costs.
• Permian.There is strong development, with operators shifting to horizontal drilling and potentially higher gas rates in new oil plays.
• Mid-Continent.Development has slowed due to low
NGL pricing, but there is significant upside as pricing stabilizes.
• Piceance.Development slowed in 2012, and there is marginal gas play.
• Bakken.There is aggressive development.
• Montney.Development is slowing in lean areas, while gas-processing facilities are built and well performance improves.
Associated gas production is rising as shale growth dominates, and there is strong NGL production growth despite slowing gas production growth.
“We don’t expect conventional reserves to be a factor in the NGL market within the next 10 years,” she said. “The decline rate continues. Economics continue to support the development of the shale gas price. That’s what is really underpinning the supply growth of NGL.
“Crude oil drilling is pulling enough gas that is associated with the production of crude to continue to make NGL markets grow. Even though we don’t have an increase in the amount of natural gas, the liquids coming out of the gas are strong and are continuing to increase NGL supplies.
“A considerable amount of NGL that’s now coming out of this gas is now ethane. The story for us in terms of material handling is moving on to a higher pressure side. Ethane requires significantly high pressure and low temperature, so that’s a big area of interest. Propane is not as severe in terms of the investment that’s required, but we still have to put in a considerable amount of capital to store it. A lot of the chemicals industry worldwide is focused on ethane, and because it is over 50% of the NGL we see coming out of the ground in the future, we get a lot of requests from people who want to know how much ethane we think will be available over the long term. A lot of ethane producers are making plans to put in facilities.”
She said continued pressure on Rockies ethane values likely will continue to 2016 or 2017, if significant Marcellus/Utica volumes head to the Gulf Coast. The all-time-high US ethane demand of one million bpd was in late 2011.
“If you think about propane in the traditional sense, the rest of the world sees that as the way you see on TV: They use it as substitute for natural gas,” she said. “It’s cooking. It’s heating. It’s affordable fuel. You don’t have to build pipelines or worry about a distribution grid. You can just go up and down the street and change people’s cylinders. The rest of the world still looks at LPG as an upgrade from burning trees or animal dung.
“To the extent that the global market is growing, you can get a better price offshore as long as that market grows enough to take your production. For the next two to three years, we simply don’t have enough dock space to load enough ships to get it overseas. We have two terminals on the US Gulf Coast. One already has expanded to handle another 100,000 barrels. In order for us to expand beyond that and to be in the global market in 2015, we have to build new capacity. In meantime we’re constrained here.”
Keller said the consumption of crude oil and refined products just isn’t growing as fast as our ability to get it out of the ground.
“For crude oil, you can see the industry has been busy expanding the pipeline grid,” she said. “There have been a ton of railroad grids. We just don’t have a good enough match between pipelines coming down from the production fields and pipelines going to distribution hubs . When you have a choke point, there is going to be an inability to manage.”
Constraints on the pipeline systems may indicate a need for breakout storage, she said. Growing Canadian and Bakken crude supply mean Enbridge Mainline bottlenecks at Clearbrook and Superior. The Platte system is at full capacity with shipments 85% oversubscribed, and Cushing remains a challenge as crude supply growth outstrips pipeline capacity. Crude supply has become dominated by domestic and Canadian grades.
Working capacity for crude storage is currently about 83 days of total US refinery demand. As of March, there was just over two months’ supply in storage. About a one-month supply can be held in non-government storage. Currently there are about 19 days in storage, and, as of March, there was about 52% utilization.
An additional 50 days’ supply can be held by the US Strategic Petroleum Reserve, which was 96% full in March. Cushing storage was still 75% full in March, but this should improve as pipelines expand.
In terms of gasoline storage utilization and the outlook for bulk terminals, she said exports are increasingly important for Gulf Coast (PADD III) refiners.
“The overall storage capacity appears adequate at 40 days’ demand,” she said. “We may see an increasing need for high-capacity storage to hold cargo size parcels for loadout at ports—and more use of underground storage where available.
“For distillate storage at bulk terminals, the overall storage capacity appears adequate at 40 days’ demand.”
She said slow domestic demand growth and reduced imports mean staging components could move offshore.
“Pipelines are converging on Houston, but local demand isn’t growing and we certainly can’t send it someplace else in the US that quickly,” she said. “Crude storage appears adequate other than for pipeline support—replacing imports with domestic barrels. The current requirement to have export licenses for crude oil encourages splitters, topping units to separate components. There are opportunities to increase throughput via breakout storage and access to components.”
She said the preferred system for NGL storage is underground because NGLs require high pressure (heavy steel) or refrigeration systems above ground.
“There are very few above-ground facilities for propane over 100,000 bbls,” Keller said. “There are no large purity ethane storage facilities above ground; it’s mostly contained in NGL mix going to a fractionator or in swing storage at a plant. There are over 370 million barrels—over 100 days’ production—of storage capacity for NGLs and LPGs in the US already. A lack of storage is a constraint in the Marcellus/Utica area facilities as production grows.” ♦