Midstream construction continues apace. The oil and gas industry must have new infrastructure—and repurpose the infrastructure it has—to meet the needs of customers at both ends of the supply chain. The near future could see a near-record building boom, contractors say.

Maybe. The construction business faces significant hurdles if it wants to meet that demand.

“Right now with the projects that the industry has projected for the upcoming years—identified, bid and already awarded—the industry is heading back to the levels we experienced in 2008,” Rob Riess, vice president and division manager, pipeline division, for Henkels & McCoy, a leading construction and contracting firm, told Midstream Business. What he finds “kind of scary” is whether contractors will be able to overcome various hurdles and get the job done.

An executive with another major pipeline contractor told Midstream Business the company is “busier than we have been in years.”

Riess cited multiple hurdles that could slow work, including shortages of equipment and qualified manpower, as well as regulatory hurdles that have slowed or delayed a backlog of ready-to-go projects.

Regulatory roadblocks
First, consider the regulatory hurdles. The biggest roadblock to numerous interstate pipeline projects was the lack of a quorum at the U.S. Federal Energy Regulatory Commission (FERC), which must review and approve gas pipeline proposals. The agency went more than six months without enough voting members to take action following resignations and term expirations.

The Senate finally approved two nominations by the Trump administration in early August, voting for the nominations of Neil Chatterjee and Robert Powelson to the commission. Along with the commission’s sole remaining member, Cheryl LaFleur, that provides the three members necessary for action by the five-member agency.

“We aren’t counting our chickens yet, but the approvals would certainly be a net positive for midstream industry growth, and ultimately for producers and consumers of natural gas,” said Ethan Bellamy, a managing director at Robert W. Baird & Co.

“With roughly 80-100 orders issued each month at FERC, the lack of quorum means that the new commissioners will need to hire staff and start on a mountain of ~500 orders. So, the longer delay, the longer to recover from the delay. Each day that passes digs the paperwork hole deeper, preventing real holes from being dug by contractors,” Bellamy added in a recent research report.

The recently approved FERC commissioners constitute a step in the right direction, Riess said, but state and local agencies have a say in projects and each of them moves at its own pace and responds to its own constituency. Some of these constituencies include very strong, anti-development protests.

“The critical element that everybody needs to be aware of and keep in the back of their mind is the impact that public opposition has to these pipeline projects. Whether it be in the form of opposing a permit, whether it be in the form of protesters showing up onsite and making a human body chain or even chaining themselves to the equipment,” Riess said, “the public influence has become such an unknown wild card that you just really can’t predict it. No one has all the answers on how to deal with public opposition.

Kenny Cantrell, vice president of operations for Jasper Ventures Inc., told Midstream Business that the state regulatory issues are a concern—even for companies very familiar with the energy industry.

“Permitting is an issue for our clients,” Cantrell said. “Regulatory complexity varies by state.”

Jasper Ventures specializes in fabrication and construction of gas processing plants and related assets and has completed multiple recent projects in the Delaware. He recalled one project in particular in the northern Delaware Basin in New Mexico where “it took six months before we could begin plant construction because of permitting, which hinders our client’s schedule.”

A related issue—particularly in the Delaware—is getting electrical power to a plant site. Air emission regulations sharply limit the ability of midstream operators to use gas-fired engines to turn compressors or pumps. Therefore, the only option is power from the local utility of rural cooperatives, Cantrell explained—which can be a major obstacle due in large part to the Delaware’s rapid buildout.

Dealing with public opposition is an industry-wide concern for the energy business, and Riess has been active in efforts to understand, and respond appropriately to, the opponents. He is a former chairman of the INGAA Foundation and currently serves on its executive board as an ex-officio member. He also serves on the Pipe Line Contractors Association board of directors.

“We talk about this topic on a regular basis at INGAA Foundation meetings and we have prepared a guideline on how to address public opposition and prepare for it. But I really think that preparing for this opposition will take lots of hard work and unity in our industry, these opposition groups are very well organized. They are getting paid to go out protest, they are training them, they are taking them through training videos and teaching them how to be peaceful protesters—but yet disruptive—which still impacts the contractor work and therefore our customer, the pipeline operator. So I believe that’s one uncertainly that will continue to impact our industry,” he said.

Buy American
Another potential regulatory hurdle could come from the Trump administration’s buy-American efforts. Contractors point out not all sizes and grades of line pipe are manufactured in the U.S., and the same holds true for valves, control equipment and other basic materials. A review process on the policy’s waivers has not been established.

In Canada, Kinder Morgan said it will start construction on its CA$7.4 billion Trans Mountain Expansion Project in September after ordering 496 miles of pipe from a Canadian steel mill in the second quarter. The project drew extensive regulatory scrutiny and strong opposition from environmentalists. Scheduled to enter service at the end of 2019, the work will expand Trans Mountain’s capacity to 890 Mbbl/d from 300 Mbbl/d. The expansion is regarded as a key link that will enable Canada to expand its oil exports.

The project faces bitter opposition from British Columbia’s recently elected government, which has promised to throw every roadblock possible in front of the project, even though the federal government in Ottawa has approved.

Resource restrictions
Assuming the permits have been issued and the public goes along with a project, the contractors and the midstream operators they serve face other hurdles, Harry New, president of oil and gas for Willbros Group Inc., told Midstream Business.

“I think another challenge for contractors that we’re seeing right now is just the resources we need,” New said of Willbros and other construction firms. “For example, experienced personnel. There’s more work out there if you could take it on, but you get somewhat hesitant because you don’t have the personnel. You don’t want to take on work with a big quantity of unknown personnel who you don’t know. You don’t know if they can perform or not and put yourself at risk.”

Skilled workers, such as journeyman welders, are in short supply and in high demand, not only for new gas plants and pipelines but for such projects as Enterprise Products Partners’ big propane dehydrogenation (PDH) plant at the Mount Belvieu NGL hub outside Houston. Scheduled to go onstream in September, the plant will produce 750,000 tonnes of polymer-grade propylene each year. It’s just one of many new petrochemical plants going up along the Gulf Coast as chemical firms move in to make the most of the comparatively low NGL feedstock costs in the U.S.

And all of those projects need the same skilled workers as pipeline projects.

However according to Cantrell, due to the nature of gas plants, compressors and pump stations, lack of manpower has been less of an issue for Jasper Ventures than for pipeline contractors.

“We’ve been able to utilize our personnel and hire new people as needed. Finding and hiring new personnel has not been an issue to date. We’re very blessed in that regard," he said.

This is due in large part to the company’s utilization of one of its two East Texas shops to perform tasks that otherwise would have to be completed in the field. Plant design is modular and equipment is mounted on multiple skids that are then trucked to a plant site for final assembly.

“We minimize our time in the field. We will have a fraction of the staff onsite compared to some of our competitors. Our business model is to utilize our shop as efficiently as possible. We skid mount all of the equipment we can. Obviously, there are some pieces of equipment that won’t fit on a skid and making an attempt to do so would be economically unsound. However, we are able to do the majority of our fabrication in our shop,” he said.

A cyclical business
The contracting industry is highly cyclical and one of the biggest players in energy industry projects—CB&I Inc.—provided a reminder of that when it announced tough second-quarter financial results. Its net loss of for the April-June period was $304.1 million, compared with net income of $115.6 million for second-quarter 2016. It credited the change to completion of a big foreign LNG plant and a slowdown in domestic LNG work.

But long-term, the company said it plans to sell some of its non-energy operations and focus more on its core business.

“We envision a bright future for CB&I as a highly focused company with tightly integrated EPC [engineering, procurement and construction] and fabrication capabilities serving the LNG, petrochemical, refining and gas power generation markets,” Patrick Mullen, president and CEO, said in the firm’s earnings release.

Equipment, or the lack thereof, is another concern.

“It’s an issue for everybody” in the contracting business, Riess added. “I met with several of the big Caterpillar rental companies in the United States and right now, it’s hard to locate any available rental equipment. So once you utilize all of your existing contractor equipment fleet and you're trying to supplement with rental equipment, it’s very difficult.”

That’s particularly true for the equipment needed to do big-inch pipeline projects, New said. “There’s a huge shortage and I think a lot of that is attributable to all the work going on right now, that’s where a lot of the equipment is. That kind of touches on the Northeast, and the other big focal point we’re seeing is the Permian.”
Compressor complaints
Likewise for compression, Cantrell said. “The larger Caterpillar engines have lead times in excess of a year, so if you don’t buy your compressors in time you won’t be able to get your plant installed in a tight schedule.”

Lincoln Electric Holdings Inc., which manufactures welding equipment, reported second-quarter earnings that cheered analysts. It takes a lot of welding equipment to build pipelines, gas plants, pump stations and tanks, and Lincoln has been the beneficiary.

Add it all together and a large pipeline project takes a lot of resources to build, Riess pointed out.

“For example, one of the largest projects being constructed in the Northeast is employing in excess of 8,000 workers right now. So when you look at the sheer numbersand the other work that’s going on, you have to ask, can we get the people? Sure, we’ll be able to get people, but are they going to be experienced people who have any experience constructing pipelines? Probably not, and that will be a challenge,” he said.

As New mentioned, big focal points for construction are in the Northeast—building out the Marcellus and Utica plays and connecting them to markets—and the Permian Basin in West Texas and New Mexico. The Midcontinent region, particularly Oklahoma’s Stack and Scoop plays, are also attracting a lot of activity.

But progress has been made in some of the multibillion-dollar projects. The hotly debated—and delayed—Dakota Access Pipeline entered service late in the second quarter and the Sabal Trail Pipeline linking the Transco system of The Williams Cos. Inc. to Florida started up at midyear.

Northeast projects
The northeastern states are a focus of activity as the midstream builds out to serve Marcellus and Utica customers.

“Right now, there’s a significant amount of work going on with the Rover project in West Virginia and Ohio and also Sunoco's Mariner East project,” Riess said. The $4.2 billion, 713-mile Rover Pipeline will move 3.25 billion cubic feet per day (Bcf/d) of Appalachian gas to the Defiance, Ohio, gas hub and north into Michigan and Ontario. It was scheduled for completion in November, but some spreads have been delayed because of environmental impact questions.

“Atlantic Sunrise has a FERC permit but they do not have their environmental permit from the state of Pennsylvania,” Riess added. The Transco unit of Williams proposes to lay 183 miles of new pipe and loop 12 miles of Transco’s existing Leidy line to move Marcellus gas south and east into Transco’s system, serving customers in the Mid-Atlantic and Southeast regions. It will add 1.7 million dekatherms per day of capacity to Transco. Construction is scheduled to start in late 2017, but that all depends on Pennsylvania.

Other big projects coming up in the Northeast are a planned expansion of TransCanada’s Columbia gas system, Dominion’s Atlantic Coast Pipeline, EQT’s Mountain Valley Pipeline, and Enbridge’s Atlantic Bridge project in New England and NEXUS Pipeline in the Midwest.

And the much-delayed Constitution Pipeline could see work sometime soon. Approved by FERC in December 2014, Constitution would be a 125-mile, 30-inch line that would move Appalachian gas into New York and New England. But legal wrangling stemming from state and local efforts to block the project has delayed the start of work on the Williams-sponsored project.

Work across Texas
The Permian has continued to grow despite weak commodity prices, and that put a lot of pipeline projects on the table to move the basin’s production to the Gulf Coast and south into Mexico.

“We’re heavily involved right now in the Stack in Oklahoma and also the West Texas-New Mexico area in the Delaware,” Cantrell said, adding that the company has three installation crews in the field in the third quarter, with an additional crew beginning in October—two in the Delaware and two in the Stack.

“Right now, the majority of our proposals are coming from those areas. In the Delaware, we’re in an area where there are three plants going up within a mile radius of each other. It’s hot and heavy up there. Since 2014, we have contracted six turnkey gas plant projects with a total processing capacity of 755 million cubic feet per day (MMcf/d) in the Delaware. We have been asked to quote multiple plants over the past few months. In the majority of cases customers were asking for 200s [200 MMcf/d].”

“You’re hearing all the buzz when you start talking about going into 2018, all the long-haul lines,” New said. “Enterprise [Products Partners] is talking about building another line from their Permian gas plant, what they’re calling their Shin Oak Project. That's a line all the way from their plant in the Permian all the way back to Mont Belvieu [Texas].” The 571-mile, 24-inch NGL system will enter service with a capacity of 250,000 barrels per day (Mbbl/d), expandable to 600 Mbbl/d. Service is scheduled to start in second-quarter 2019, if not sooner.

Enterprise crude line
Enterprise is nearing completion on its Midland-to- Sealy Pipeline that will move Permian crude oil to the Sealy storage terminal west of Houston. The 416-mile, 24-inch line is scheduled to enter service at 300 Mbbl/d late this year with a proposed expansion to 450 Mbbl/d in 2018. That line is being built in conjunction with an expansion of the firm’s Midland Crude Oil Terminal.

And then there are gas projects.

“And, you have Kinder Morgan going to lay pipe from the Permian, probably the Waha Hub area all the way down to the Agua Dulce header” in South Texas, New added. “That line is primarily dual-purpose, either to supplement flow that Cheniere is going to need with their LNG plant at Corpus Christi. Then you have NextDecade’s Bravo Pipeline that’s on the books where they are going to build their LNG plant in Brownsville, Texas.

“Then you still have this ramping up of flows into Mexico as they continue with their conversion of the power plants to natural gas,” he said.

Smaller projects
The big-inch, multibillion-dollar pipelines get a lot of attention, but there are dozens of small-scale projects in the midstream. New mentioned Willbros won a project to add six compressor stations on Marathon’s Ozark Pipeline, for example. The related pipeline facilities market is also robust.

Crude by rail may have dropped off from its 2013-2014 peak, but the energy business creates plenty of rail traffic. Solaris Oilfield Infrastructure broke ground in August for the Kingfisher Transload Facility on the Union Pacific Railroad at Kingfisher, Okla., in the middle of the Stack play. It will have an 8,000-foot loop track and silo storage for frack sand, as well as facilities to handle pipe and other supplies headed for the Stack and Scoop producers. Completion is scheduled for January 2018.

New said terminal projects are a “very strong market right now. A lot of people are building new tankage for storage, and you build all the tanks, then you have to do all the tank terminal lines, the manifolding, the loading and everything else. That’s a big part of our business right now as well.”

Looking ahead
Riess sees a bright future for contractors despite potential snags.

“I think we’re going to continue to see the midstream market continue to grow,” he said. “I don’t monitor the drilling as much as I should, but I think things are starting to ease back into place. We felt the bidding process for 2017, as far as the work being performed in the calendar year, had come to an end. But we’re still getting bid packages on a regular basis, much smaller projects--two-, three-month duration.

“But there is still a significant amount of pipeline integrity work being bid and performed, hydrostatic testing, upgrades and mainline valve change-outs,” he added. “All things considered, I believe the outlook for the next few years in the pipeline construction industry is extremely bullish.”

Cantrell agreed. When asked about Jasper’s projects for 2018, he added, “From what we're hearing it doesn’t sound like it’s going to slow down, so I don’t see it slowing down in the near future.”
Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427.

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