With the increasing prevalence of North American shale plays, processing and treating natural gas is a big and growing business. And as the value of associated natural gas liquids (NGL) continues to rise along with the complexities of pipeline guidelines, the market for processing capabilities has never been higher.

“These shale plays are more prolific than first thought,” Caiman Energy’s Founder, Chairman and Chief Executive Jack Lafield tells Midstream Business. “In the current pricing environment, the industry will continue to see a decline in the lean gas areas and continued growth in activity in liquids-rich areas.” Natural gas processing begins at the wellhead. Primarily methane, natural gas derived from what Lafield describes as lean gas areas—such as the Haynesville and Barnett shales—is mostly gas ready for shipment to market.

Natural gas found in rich-gas areas, such as the Marcellus and Eagle Ford shales, contains varying amounts of NGLs—such as ethane, propane and butane—that must be extracted via fractionation before sale to gas transmission lines. Most gas fields also produce contaminants in the raw gas stream—water vapor, carbon dioxide (CO2), hydrogen sulfide (H2S), nitrogen and oxygen that must be removed.

Before this rich gas can be dispensed it must meet specific guidelines and quality measures for the pipeline grid to operate properly. The guidelines can vary slightly from pipeline to pipeline but most specify that before transportation the product must be within a specific Btu content range; be delivered at a specific hydrocarbon dew point temperature level; contain only small amounts of non-hydrocarbon gases; and be free of particulate solids and liquids. Meeting these requirements is the job of gas processors.

Natural gas processing is a crucial link between production and subsequent markets. There are more than 517 active natural gas processing plants in the lower 48, according to a U.S. Energy Information Administration report released in October 2012. These plants have a total processing capacity of 44.7 billion cubic feet (Bcf) per day, according to the report.

Ohio’s renaissance

A complex method that has turned into a booming business, many companies are investing heavily in natural gas processing projects. According to RBN Energy, at the end of 2012 there were at least 90 U.S. projects in the works, including new builds and expansions. These projects, RBN Energy adds, are expected to add 15 Bcf per day of capacity.

A large number of these projects are being developed in the ever-expanding Utica shale, where, according to the Akron Beacon Journal, seven processing-separation plants and four pipeline transmission networks are under construction. These 11 projects, which are building off of Ohio’s recent shale boom, have a price tag of more than $7.2 billion. “You can bring [gas and oil] out of the ground, but it doesn’t do you any good until you can move it and get it processed and get it where it’s needed,” Terry Fleming, executive director of the Ohio Petroleum Council, told the Beacon Journal last December. “Midstream is the key. It is critical. You can only pull so much out of the ground as you can transport and process.”

The abundance of the Utica shale has captured the attention of many industry insiders, including Caiman’s Lafield, whose company set its sights on the geological phenomenon while still in its infancy.

“We looked at Utica as we did when the company was first in the Marcellus,” Lafield said. “We focused on the areas that were in need of midstream facilities— pipelines, compression and processing facilities, which would meet the needs of modern shale development.”

Large scale wellhead gathering and processing is new to Ohio and the Utica, says Lafield. “We are just beginning to understand and develop the play. It’s similarly situated as the Marcellus was in 2009. Ultimately, I think the Utica will prove to be one of the top shale basins in the country, equal to or better than the Eagle Ford with a rich-gas area three times the size of the Marcellus and well quality that will be difficult to match anywhere else.”

Capital idea

In May 2012, after selling its Marcellus assets to Williams Partners for $2.5 billion, Lafield and his associates founded Caiman Energy II. In July of last year, Caiman II secured $800 million in equity commitments from Williams Partners, EnCap Flatrock Midstream and Highstar Capital to develop midstream infrastructure, including processing facilities in the Utica shale. And, Lafield says, securing capital is an essential asset to the success of any gas processing business.

“In rich-gas areas, a tremendous amount of facilities are necessary to process the gas for proper transmissionline quality,” he tells Midstream Business. “The infrastructure, lead time and the capital required in rich-shale regions is at least three times greater than the requirements for lean-gas development.

“Effective and large-scale midstream players have to be visionary, forward thinkers. You also have to be a diligent student of the reservoir. And it requires an enormous amount of capital and a commitment to taking risk alongside the producers because you have to build these facilities ahead of the drilling.”

With the capital in place, in December of 2012, Caiman announced the formation of Blue Racer Midstream, a $1.5 billion joint venture with Dominion dedicated to providing Utica producers with midstream services. Dominion contributed existing midstream assets to Blue Racer that include 500 miles in gathering lines spanning the Utica shale and the Natrium processing plant in Marshall County, West Virginia. Caiman’s contribution includes $800 million in capital and the experience and expertise required to manage and expand Dominion’s asset base.

At press time, the Natrium plant was expected to come online in late April. Initially, the Natrium complex will operate a 200-million-cubic-feet (MMcf) per-day cryogenic processing plant and a 36,000-barrel (bbl.) per-day fractionator. Immediate expansion plans at the Natrium complex call for 400 MMcf per day in processing capacity and 59,000 bbl. per day in fractionation capacity. A 200-MMcf-per-day processing plant will be built at the Berne complex in Monroe County, Ohio and the Petersburg complex in Mahoning County, Ohio. The Natrium, Berne and Petersburg sites are large enough to accommodate 1 Bcf per day in processing capacity as activity in the play expands.

Trendsetting

Prior to the start of rich-shale development in 2007, Lafield says, building up the needed processing capabilities for acreage was a simple task, but five years ago all of that changed. “Prior to shale plays, if you were looking for a processing plant you would call up facility vendors, buy a used plant, fix it up and put it where you wanted it,” Lafield says. “All of a sudden 2008 shows up, and there are no used plants to be found anywhere.”

The demand increased so much, he says, that by 2011 Thomas Russell Co., a company that specializes in the construction of skid-mounted, modular plant components, had shifted from developing one 200-MMcf perday, skid-mounted, processing plant per month, to two per month. Strengthening demand has plant construction trending toward increased lead times, taking nearly two years to get a plant built and installed, Lafield says, a financial challenge not intended for the faint of heart.

“It’s a long road,” he says. “The only way to really combat long lead times is to get in the queue ahead of time. We take a risk; we get in the queue and put our money up. We order a plant before we even know exactly where it will be placed.”

The main driver behind this increased demand is the low price of natural gas, Lafield says. With prices lingering between $3.50 to $4 per thousand cubic feet, the industry will continue to see a push for more processing capabilities within the shale plays, he says.

“One thing that is changing is the dynamics of the market and the flow of products. Supply regions are now located in totally new regions of the country, causing a big shake up in the traditional supply-to-market flow,” Lafield says. “Having said that, the demand for processing continues to grow just because of the low price of natural gas, which will continue to be perpetuated by the drilling in the shale plays.

“As long as the rich shale-gas regions in this country can keep pace with the supply needed to balance traditional declines and growth of the market, natural gas prices will remain close to where they are today,” Lafield says.

Leaning forward

Gas treating also can play an important role in areas where lean gas is the rule. In these areas there is a greater likelihood of finding higher amounts of CO2, H2S and other contaminants in the raw gas produced at the wellhead, said one industry executive. These impurities can be corrosive to gas transmission lines, so most pipeline companies enforce gas-quality specifications limiting the amount CO2 to less than 2% and H2S to less than four parts per million. Amine treating plants play a crucial role in the removal of these sour gases.

Kinder Morgan Treating LP is the largest provider of contract-operated gas treating in the U.S. Kinder Morgan has a fleet of amine plants that it leases to producers for fixed monthly fees. The producer may choose to lease the plant equipment only, or Kinder Morgan can provide full-service operations.

And, according to Bill Stokes, vice president, business development, Kinder Morgan Treating, despite a shift to rich-gas production, gas treatment is still a predominant business.

“With the shift in drilling from the lean-gas plays to richgas plays, new processing facilities are being built to extract NGLs from the rich gas streams. This has changed our business in a way that we are seeing demand for amine treating plants to be installed upstream of the new processing facilities. If there is CO2 in the gas stream, it needs to be removed before it goes into the cryogenic plants to prevent freeze ups,” Stokes tells Midstream Business. “Using an amine plant to remove CO2 is a technology that has been out there for years, we still believe it is the most reliable and cost-effective way to remove CO2 from natural gas in the field.”

In 2011, Kinder Morgan acquired SouthTex Treaters, a manufacturer, designer and fabricator of gas treating plants. This acquisition, according to a release, allows the company to offer customers the option to own or lease the treating equipment. Like its processing counterparts, the treating business has its fair share of time-based challenges that the company faces head on.

“We face challenges that are not too different from the past,” Joe McLaughlin, vice president, operations, tells Midstream Business. “With the recent activity in the rich shale plays, we are seeing longer lead times for supplies and materials and more competition for labor. But, that is not anything we are not able to work through, and we work to keep our business responsive and as cost effective as possible.”

Getting in line early, just like the processing business, is essential to combat lead time challenges, Stokes says. Anticipating the demand and having equipment available in inventory allows the company to provide faster services to customers.

As the country moves forward with the development of unconventional shale resources, the processing industry will continue to grow because the economics will continue to be advantageous. The shale boom shows no signs of stopping and with a forecasted increase in demand for natural gas and NGLs later in the decade, the future appears bright for the business.

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