Petrochemicals: Huge midstream investments underpin rebirth of US industry

23:13 PM | March 24, 2014 | —Clay Boswell

Midstream firms are spending billions of dollars on gas-processing plants, fractionators, pipelines, storage facilities, shipping terminals, and other infrastructure that enable the shale gas revolution to spark a petrochemical renaissance.

ACC announced in February a major milestone: The value of announced capital investment planned by the US chemical industry has surpassed $100 billion. The projects, 148 in all, are propelled by the flood of cost-advantaged natural gas and natural gas liquids (NGLs) now gushing from shale deposits in the United States. These plans would, however, promptly sink without the support of massive parallel investments by midstream companies such as Targa Resource Partners (Houston), Enlink Midstream (Dallas), Williams Partners (Tulsa, OK), and Enterprise Products Partners (Houston). If these and other firms did not build gas-processing and fractionation plants, pipelines, storage, and other midstream infrastructure, few of the petrochemical projects under development would be viable.

Companies in the midstream separate the useful components of raw oil and gas produced upstream and carry them downstream. The companies have, as a result, been extremely busy since the shale gale struck North America. Midstream investment in the region has totaled $283 billion during the last four years. The investments have ramped up quickly and will accelerate for the next several years, according to Oil & Natural Gas Transportation & Storage Infrastructure: Status, Trends, & Economic Benefits, a new report prepared by IHS for the American Petroleum Institute. In 2014 alone, direct capital investment in US oil and gas infrastructure will total $85-90 billion, says IHS. IHS expects spending to average $80 billion/year through 2020 and to total $889 billion over 2014-25.

Most of the investment will be driven by the energy market, but infrastructure specific to NGLs—ethane, propane, and butanes—mainly supports demand for petrochemical feedstocks. IHS expects investments in infrastructure for NGLs and liquefied petroleum gas (LPG)—propane and butanes—to total $51 billion in 2014-25, most of it concentrated in the next few years. IHS estimates that $15 billion will be invested in processing, $21 billion in pipelines, $12 billion in storage and rail transport, and $3 billion in marine transport.

Shale: A fountain of youth

The US chemical industry thrived in the second half of the 20th century because of its favorable cost position, particularly with regard to natural gas. However, when US reserves of natural gas began tapering off in the 1990s, prices began a steep increase. Just $1.55/thousand cubic feet in 1995, the average US wellhead price for natural gas shot to $3.69 in 2000 and $8.80 in 2005, according to data from IHS. With costs rising, chemical plants in the United States began closing, and production started moving to more competitive regions overseas. The US chemical industry’s best years were apparently over.

In the background, however, innovative upstream firms were developing means to access the oil and gas locked in shale deposits. These firms’ activities reached critical mass in 2008, and, in the years since, US oil production has increased from 1.8 billion bbl/year to 2.7 billion bbl/year, while US natural gas production has increased from 25.6 trillion cu feet/year to 30.2 trillion cu feet/year.

Production from shale has had little effect on US oil prices. Oil is easily shipped abroad, and regional differences in price are quickly equalized. Natural gas, however, is much more difficult to ship. North American supply has swelled, and prices have plummeted, dropping from $8.84 at the wellhead in 2008 to just $2.75 in 2012, according to IHS. Natural gas prices historically track oil prices in most parts of the world, but in North America, the two have gone their separate ways. The resulting cost differential is the basis for the North American chemical industry’s newfound competitiveness. Gas prices in the United States averaged about 60% of those in France in 2008, but, by 2012, the ratio had fallen to 16%. US gas prices are now much closer to those of the Mideast, which traditionally has the cheapest gas in the world.

The benefit for the US chemical industry is twofold. First, the chemical industry is a huge consumer of energy. Second, the components of natural gas are important chemical feedstocks. Methane, the lightest component, is also the largest by volume. Most of it is used as fuel. Less than 2% is used as feedstock for the production of methanol, ammonia, and other basic chemicals. By contrast, two-thirds of the NGLs are used to make petrochemicals, mostly olefins.

Shale has been a great boon to US NGL supply. Annual production of NGLs by natural gas plants has increased by 40% since 2008, reaching a historic high of about 1.35 trillion cu feet last year, according to data from the Energy Information Agency (Washington). The increase is partly a consequence of greater natural gas production, but the collapse of natural gas prices has also been important. To keep their drilling rigs busy without losing money, producers have shifted attention to deposits rich in NGLs, which yield a considerably higher price than natural gas that is composed almost entirely of methane (aka, dry).

The price of ethane is nevertheless much lower today than in the days before shale. Ethane averaged about 90 cts/gal in 2008, and it dropped to about 30 cts/gal in 2013. The other liquids are similarly cheaper. As a result, the cost of producing ethylene in the United States is now among the lowest in the world. Rejuvenated by these new advantages, the US chemical industry is in the midst of a $100-billion growth spurt that could include 11 ethane crackers totaling almost 14 million m.t./year in ethylene capacity.

Midstream investment flows

Several local factors have contributed to the rapid development of US shale resources and their immediate impact on the regional petrochemical industry. The factors include US law, which has incentivized development by giving landowners control of the resources beneath their properties. Also, the US oil and gas industry has deep knowledge of local geology, allowing productive deposits to be quickly identified.

For downstream consumers such as the petrochemical industry, the critical issue is delivery of supply, and the extensive midstream infrastructure already in place could immediately convey additional NGLs to existing plants, particularly on the US Gulf Coast. The network could also be readily expanded to serve new plants. However, between the volume of NGLs produced and the volume needed to supply the chemical industry’s ambitious expansion plans, fractionation and delivery capacity quickly fell short of demand.

Midstream companies have addressed the issue with their own capital program. Between 2010 and 2013, annual investment in gas processing, which removes impurities and separates NGLs from the gas stream, increased from $2 billion to $7.5 billion, IHS says. During 2012-13, about 12 billion cu feet/day of natural gas processing was added or restarted in the United States, a volume equivalent to almost 20% of total US natural gas demand. IHS projects $178 billion in investment in gas processing during 2014-25.

Investment in fractionation, which isolates the separate NGLs, has likewise ramped up, increasing from under $1 billion in 2010 to more than $4.5 billion in 2013. IHS estimates that during 2012-13, more than 1 million bbl/day of NGL fractionation capacity was installed—enough to handle almost one-third of total US NGL production—and IHS expects the pace of investment to remain high through 2015. During 2014-25, IHS projects total spending of $14.8 billion on NGL and LPG processing.

The investments are concentrated around two NGL fractionator hubs. One is Mont Belvieu, TX, which has long been the US Gulf Coast’s main supplier of NGLs. Mont Belvieu is also close to the liquids-rich Eagle Ford Shale Basin in Texas. IHS expects eight major expansion projects there to add almost 700,000 bbl/day of fractionation capacity during 2013-15.

The second hub, located in the heart of the Marcellus and Utica shale regions of Pennsylvania, Ohio, and West Virginia, is fairly new. “Notionally identified as the Houston, PA, hub, this is actually a complex of some 16 de-ethanizer and depropanizer plants, which will likely grow to an interconnecting network of 25 individual facilities involved in the fractionation of NGLs,” IHS says.

Midstream firms are also building NGL pipelines, the primary means of transportation. During 2010-13, annual investment tripled, to more than $3 billion, IHS says. IHS forecasts total NGL pipeline investment of $21 billion during 2014-25, with several large projects linking the gas-processing facilities of western Pennsylvania and Ohio to the US Gulf Coast and marine terminals on the Delaware River, such as those at Marcus Hook, PA.

Busy as bees

Most major midstream players have multiple large projects underway. One of the most active players in the Marcellus and Utica basins is MarkWest Energy Partners (Denver). The company has, in the last eight months, completed eight projects in the region, including the installation of 1 billion cu feet/day of gas processing capacity and two fractionators with a combined capacity of 100,000 bbl/day. Currently the company is developing 19 facilities that will together increase its gas-processing capacity in the region to 5 billion cu feet/day and its NGL fractionation capacity to more than 400,000 bbl/day.

MarkWest and Sunoco Logistics have partnered on two Mariner projects. Mariner West is an ethane pipeline connecting MarkWest’s Houston, PA, fractionation complex to customers at Sarnia, ON, such as Nova Chemicals, which recently converted a 839,000-m.t./year flexicracker to run exclusively on Marcellus ethane. Mariner East is a 70,000-bbl/day pipeline that will carry ethane and propane from the Houston fractionation complex to Marcus Hook, where Sunoco is developing an NGL export terminal. Sunoco expects the pipeline to begin delivering propane later this year and ethane in 2015. Meanwhile, Sunoco is planning a second-phase pipeline that will carry ethane, propane, and butane to Marcus Hook beginning in early 2016.

Several projects aim to connect the Marcellus and Utica region to the US Gulf Coast. Kinder Morgan Energy Partners (Houston, TX) and MarkWest are planning a 200,000-bbl/day NGL pipeline from Ohio to new fractionation facilities at Mont Belvieu, with start-up in late 2015. Named the Utica Marcellus Texas Pipeline, it will be expandable to 400,000 bbl/day. Kinder Morgan and Targa will build the fractionators, beginning with a capacity of 150,000 bbl/day but expandable to 400,000 bbl/day.

Enterprise last year completed its Appalachia-to-Texas Express pipeline, which can carry up to 125,000 bbl/day, and potentially 265,000 bbl/day, of ethane fractionated in the Marcellus and Utica region to Mont Belvieu. The company is still building the Aegis pipeline, which will send ethane from Mont Belvieu to the Gulf Coast.

Boardwalk Pipeline Partners (Houston, TX) and Williams have partnered to develop the Bluegrass Pipeline, which would carry 200,000 bbl/day, and potentially 400,000 bbl/day, of mixed NGLs from Ohio, West Virginia, and Pennsylvania to the Gulf Coast. The partners recently pushed their target date back to mid-2016, however.

Enlink Midstream, created earlier this month by the merger of Crosstex Energy and Devon Energy, will soon complete the second phase of its Cajun-Sibon NGL pipeline extension and fractionator expansion. The company is installing fractionators with capacity for 100,000 bbl/day of mixed NGLs at Plaquemine, LA, and expanding the pipeline’s capacity by 50,000 bbl/day, to 120,000 bbl/day.

The Williston Basin, site of the Bakken Shale formation, has also attracted pipeline investment. Oneok Partners (Tulsa) completed last year a $500-million, 60,000-bbl/day pipeline to carry mixed NGLs from southern Wyoming to fractionators at Conway, KS. Called the Bakken NGL Pipeline, it is the first to carry NGLs from the Williston Basin to the Mid-Continent region and the US Gulf Coast. Oneok is currently expanding it to 135,000 bbl/day, with completion expected in the third quarter.

Phillips 66 recently announced plans to construct a 100,000-bbl/day NGL fractionator at Old Ocean, TX, to begin operation in late 2015. Phillips 66 also plans to install a 100,000-bbl/day deethanizer to purify propane for export.

NGL exports to buoy prices

Efforts to develop shale resources outside the United States have made little progress, but with export capacity growing, petrochemical producers overseas will not be completely left out. Midstream firms are strongly motivated. Setting aside the recent effects of an unusually cold winter on propane, oversupply has severely depressed US NGL prices. Exports would tighten the domestic market and allow prices to rise to more sustainable levels, according to a report on LPG marine export terminals published last year by IHS.

LPG, being easier to ship than ethane, has received the most attention, but ethane exports are also in the works. There are currently four LPG export terminals in the United States, with several more in planning.

Enterprise has the largest LPG export terminal, a 78-million bbl/month facility at Houston, TX, that went online in March 2013. Enterprise plans to expand its capacity by 1.5 million bbl/month as of early 2015. The company is also planning a second terminal on the US Gulf Coast, to start up in late 2015. The facility, which will accommodate very large gas carrier (VLGC)-class ships, will have an initial capacity of up to 6.5 million bbl/month of propane or butane. Enterprise expects the facility to operate at or near capacity on start-up.

Targa recently expanded its Galena Park, TX, LPG export facility to 3.25 million bbl/month, and the company plans a further 12-million bbl/month expansion for the second half of 2014. The company began loading VLGCs in June 2013.

Sunoco’s Marcus Hook terminal, which is supplied by the Mariner East pipeline, has a capacity of about 300,000 bbl/month, to be expanded after pipelines linking the Marcellus and Utica shale basins are completed this year. The terminal will receive and ship ethane as well as LPG. Range Resources has agreed to supply ethane for at least one of Ineos’s European crackers through Marcus Hook. Consol Energy announced in February that it would also supply ethane to Ineos in Europe through Marcus Hook (p. 28).

Chevron and BP have a small terminal at Ferndale, WA, that exports butane during summer months.

Other LPG export terminals are planned. Sunoco and Lone Star NGL Fractionators are planning a 4-million bbl/month terminal at Nederland, TX, scheduled to begin operations in early 2016. Shell has agreed to take eight VLGCs of propane per month, equivalent to about 4 million bbls, with an option for two primarily butane VLGC cargoes each month.

Phillips 66 announced in February that its board had approved the construction of an LPG terminal at Freeport, TX. The terminal will have an initial export capacity of 4.4 million bbl/month, or eight VLGCs, when it starts up in mid-2016. A 100,000-bbl/day deethanizer will also be installed near the Sweeny, TX, refinery, to upgrade propane for export. China International United Petroleum & Chemicals, a Sinopec subsidiary, signed a long-term contract earlier this month to purchase propane from Phillips 66 for use as feedstock.

Occidental Petroleum is building an LPG export terminal at a former naval base at Ingleside, TX. The terminal will have capacity to load about four VLGCs per month of propane, equivalent to approximately 2 million bbls, beginning in late 2015.

Williams and Boardwalk announced jv agreements on 1 October 2013 to continue development of their Moss Lake LPG Terminal in the Lake Charles, LA, region.

Meanwhile, Enterprise is testing customer interest in an ethane terminal at Beaumont, TX, or on the Houston Ship Channel. The company says it sees northwest Europe as a “prime opportunity” for the sale of ethane from the United States.