Modeling Midstreams Growth

It's been said before, but it bears repeating: The midstream industry is booming with new construction projects springing up not just in North America but around the globe. Thus far, there have been a number of large liquefied natural gas (LNG) projects in Australia, Europe, South America and Asia; countries that are involved in unconventional exploration and production (E&P) operations that will soon require midstream infrastructure build out.

In the past few years, there have been a number of international energy companies investing in North American shale production assets in order to learn how to translate unconventional development and technology in their own backyards. Arguably, the biggest of these investors has been China, which acquired a 33% interest in Chesapeake Energy's South Eagle Ford leaseholds recently.

"China will be taking on a more prominent focus on their shale gas plays, which will drive significant infrastructure build out," says Ken Dooley, industry-marketing manager at Aspen Technology Inc. (AspenTech), based in Burlington, Massachusetts.

China's build out could occur relatively fast as the country will benefit from working with an experienced shale gas producer in Chesapeake, as well as the fact that the country lacks many of the regulatory and political hurdles that other countries face in regard to hydraulic fracturing and water safety.

More than half of AspenTech’s business comes from outside North America, including customers that are beginning to monitor carbon emissions. Source: Aspen Technology Inc.

"I think China will very quickly accelerate their development because of their North American shale investments and the knowledge gained from working with proven technologies. I think in the next several years we're going to see some significant construction there because it's not bound," he says.

China's midstream infrastructure needs are very widespread since the country has historically favored conventional oil production and because current facilities are old. As the country expands its shale production, these production centers and hubs will be located in other regions than in the past. As a result, the country will be starting from zero in terms of midstream operations with a need for processing and treating facilities, compressors and pipelines, which are not in place today.

In addition to its domestic resources, China is also tied into many of the offshore LNG projects in Australia as the primary customer, which will require the construction of new receiving and regasification terminals.

China's investments

"These investments are taking place on the coastal regions, but from there they will be investing in distribution networks to move this gas within the country to power plants and chemical plants. These networks could eventually be tied into their systems directed at their shale resource developments and lead to more investments in the country's interior region," says Sanjeev Mullick, AspenTech's director of global accounts.

AspenTech is one of the largest suppliers of process simulation software, including Aspen HYSYS. This modeling software is used in the design, optimization, planning, management and monitoring of oil and gas production, natural gas processing and petroleum refining.

"Once volumes are flowing out of the well, our tools are designed to work with processing facilities, compressors, gathering systems, oil and gas separation facilities, gas-treating plants and dehydration units. Many of our tools are then used to help a customer monitor the operations of these facilities, troubleshoot them and help optimize the production and maximize the margins," Mullick says.

Being used so extensively in the industry—especially in construction and operations—the company is able to provide a strong outlook for not just new builds, but where the processing industry is headed.

"We offer the technical solutions to help companies design and manage plants in a very efficient way by maximizing engineering and production activity. This is why E&C (engineer and consultant) companies such as KBR, Jacobs, WorleyParsons, Foster Wheeler and Technip have standardized on our portfolio. Our products help them design these facilities in a very productive and efficient fashion, including optimizing the designs for performance and in terms of capital and operating costs," Mullick says.

Between 50% and 60% of the company's business comes from outside North America, and both Mullick and Dooley noted that customers were beginning to increase their use of the company's simulations to monitor carbon emissions. Mullick adds, "We've seen this trend grow over the last four to five years, especially in Canada, Australia and Europe, which all have tight regulations for a variety of emissions."

Many of the company's customers in these countries are using software they developed on top of HYSYS to keep track of emissions and make reports to regulatory agencies on a daily basis. This enables them to predict where emissions are going in any given month and make adjustments to stay within allotted emissions levels.

Such usage has become so popular that AspenTech's latest versions of HYSYS and Aspen Plus, which petrochemical manufacturers use, track carbon-emission potential on every stream and piece of equipment. "Whenever you do a simulation, even during design, you will know the carbon-emission potential of each design. It can even calculate the potential carbon tax if there is one in place in that country," he adds.

Emissions monitoring

Although it doesn't appear that federal cap-and-trade legislation on carbon emissions will be passed anytime soon, U.S. domestic producers and midstream monitors can benefit from having the capability to track emissions should state or federal emission reduction legislation eventually pass.

In addition to China and South America, there is also a lot of oil and gas construction activity in India, the Middle East and Russia.

"From a long-term trend, we are seeing a lot of demands for our products in these regions because of new construction. It's related to new production as well as increased demand for plastics and other petrochemicals from growing populations," Mullick says.

While the rest of the world is just beginning to eye midstream growth because of the advent of shale plays, the U.S. remains the largest shale gas player in the world. This is, of course, leading to not just an incredible increase in natural gas and oil production from unconventional plays, but to new infrastructure to transport these volumes since the regions this production is coming from haven't been focal points for the energy industry in recent memory.

There have been major upticks in midstream construction projects in the hot shale plays —the Marcellus, Bakken and Eagle Ford—along with more mature shales such as the Barnett and Haynesville.

In the case of the Marcellus, there is uncertainty as to whether there will be much more processing growth outside of the MarkWest Liberty system, but there is still a great need for additional transportation capacity out of the play to regions with spare capacity.

The same holds true for petrochemical plants, where companies such as Shell, Dow and ChevronPhillips have expressed interest in building ethane crackers on the Gulf Coast or in the Northeast. Even if an ethane cracker isn't built in the Northeast, there will still be a need for a pipeline to transport ethane from the Marcellus to crackers in the Gulf Coast and/or Sarnia, Canada.

"The prevalence of shale gas and liquids has flipped the economics to the point where the U.S. is one of the most economic regions for petrochemical production. We now find that many customers are looking at projects to enhance or build new petrochemical plants in the U.S. At $2.50 to $3per million Btu, shale gas and associated NGLs (natural gas liquids) are the cheapest source for energy and raw materials," Mullick says.

U.S. Northeast issues

Although the Northeast is one of the regions of the U.S. that will be experiencing the most new midstream construction, it is unlikely to become a major hub because of political and regulatory issues, according to Dooley.

"There are two issues in the Northeast: one is the actual building out of the infrastructure and the other is the roadblocks from local, regional or state groups that will accompany these buildouts. Creating a Northeast hub certainly makes sense from a logistical and technical standpoint. However, I think the barriers will make it difficult," he says.

The same holds true for the bottlenecks that the industry is experiencing in the Midcontinent at Cushing, Oklahoma and Conway, Kansas. "These bottlenecks are non-technical, which makes it very difficult to predict when they'll actually be lifted. There are political and regulatory issues and, in some cases, there's uncertainty, which is probably the worst thing for businesses," Dooley says. "Right now, things are almost at a standstill in the Midcontinent until the Keystone XL decision is finalized. I think there's finality that if Canadian producers make the decision to steer the oil sands production to the West Coast for export, it will be very hard to reverse that decision and steer this production to the Gulf Coast."

The prolific nature of shale plays has helped to lower U.S. natural gas prices to the point where they are among the cheapest in the world and could provide producers with extremely attractive margins should gas be exported to higher-priced regions such as Europe and Asia.

Already, several U.S. LNG import terminals owners are seeking to reconfigure their facilities to act as export terminals. "If the U.S. gets into the gas-export business, European markets will be the biggest target markets," Mullick says. That would lead to the construction of new regasification terminals in these markets, he added.

Lower gas prices have caused producers to divert rigs to liquids-rich plays because of the higher liquids and oil prices. In an effort to optimize their performance and production, AspenTech customers have also used the company's simulation tools in processing and production optimization to target wells tied into their facilities that will produce more liquids than gas. The simulation tools that the company offers provide users with this data in near real-time for operational decision support.

Getting into midstream

This ability could be even more important as both Dooley and Mullick sense that more of the large integrated companies will be getting into the midstream sector.

"Several of the large companies have been divesting and splitting back apart. The trend of consolidating everything is now ending," Dooley says.

"A lot of the investments in shale and early risk-taking were done by smaller and midstream companies. We've been seeing the larger players watch from the sidelines, and they are now beginning to take equity positions through acquisitions," Mullick says.

He adds that this trend is also taking place in the engineering sector with larger companies acquiring smaller engineering companies. "It's just the nature of the game where the big guys don't want to be left out on the engineering, midstream or E&P front. This is especially true in E&P since the international oil companies are getting access to fewer and fewer production assets—especially internationally, where governments and their national oil companies control the assets. Shale is one way for these companies to grow their proven reserves."

Regardless of the customer, Mullick is confident that AspenTech can provide valuable tools for their projects.

"We have been very successful in selling to our engineering customers, as well as the owner-operators who pay for these projects, that there is a better way of doing things by integrating the engineering workflow. In most projects, 80% of the costs get locked in before most of the engineering is done, and that is because decisions have to be made very early, he says."