Playing For The Queen

If the midstream industry were a game of chess, then the Gulf Coast would be the game’s queen—the most powerful piece that can be used in multiple ways.

Although it can be argued that the unconventional revolution’s heart can be found in the Marcellus/Utica, Eagle Ford or Bakken, the Gulf Coast is easily the midstream’s showpiece. No matter the issue, resolution comes, in one way or another, from this region.

Need more processing capacity for Marcellus gas? Ship via pipe to the Mont Belvieu, Texas, natural gas liquids (NGL) hub.

Need more refining for Bakken crude? Send it by rail and pipe to the Gulf, and it will find a refinery.

Need new markets for your NGLs? Send it to the Gulf, and it will be cracked and used domestically by the petrochemical end-users in the region or exported as liquefied petroleum gas (LPG).

Too much natural gas for your local market? Send it by pipe, and it will be exported as liquefied
natural gas (LNG) from a new Gulf Coast liquefaction plant.

The list goes on, and more and more the same holds true for the Gulf Coast region. The queen is becoming more and more important.

“The Gulf Coast is a central point for a lot of infrastructure. We’ve got new pipeline systems that have opened up or will be opening up here along with new fractionation capacity,” Peter Fasullo, principal at En*Vantage Inc., a Houston-based advisory and energy investment firm, tells Midstream Business.

Not too long ago, the Gulf Coast market was primarily Mont Belvieu. That is no longer the case. “The market is spreading out between Corpus Christi [Texas] and the Mississippi River,” Fasullo adds.

Indeed, in the past several years multiple projects have been cropping up throughout this vast stretch, including new infrastructure in such places as Sweeney and Beaumont, Texas, and Plaquemine and Lake Charles, Louisiana.

Plugging in Corpus Christi

Roland Mower, chief executive of the Corpus Christi Regional Economic Development Corp., tells Midstream Business that the expansion of infrastructure related to the Eagle Ford shale into that city has resulted in it becoming one of the top 20 U.S. cities for job expansion with a 3.62% growth rate in 2013. This is expected to average 2.4% for the next five years

It is impressive for such a moderately sized city of 434,000 in the metropolitan region. “We have an economy that is focused on producing goods and services, which we export out of the region with the fifth-largest port in the country by tonnage. We also have the largest free trade zone in the U.S., which runs from Corpus Christi to Dallas-Fort Worth,” hesays while noting that the city did not aggressively pursue energy industry opportunities.

In fact, it was the oil and gas industry that found Corpus Christi because of the transportation options that are offered via ship, barge, rail, truck and pipeline there. The port has dockside rail service from three platform railroads, which allows for competitive pricing.

According to Mower, some companies prefer to ship their production into Corpus Christi rather than Houston because of the reduced traffic that allows trucks to get to their locations faster despite being farther away.

“Our port allows companies to take product off their ships, put it on a truck, and it can drive 12 hours and hit El Paso without hitting a single stop light. That same company unloading in the Port of Houston could spend a day getting the truck out of the port and the city of Houston.

“Corpus Christi is a very strategic location in terms of our geography being on the Gulf Coast and one of the closest ports to the Panama Canal, which will create some interesting opportunities down the road. If you’re coming in to the port from other parts of the world, you will not only serve the U.S. market, but also support the activities of Central and South America,” he says.

Staying in Mont Belvieu

While the Gulf Coast is expanding to other areas, the existing large network means that it will not be leaving Mont Belvieu. It is easy to see why the region has been the traditional home of the U.S. midstream and petrochemical industries. It has large storage capacity through salt domes, close proximity to production regions, easy access for domestic and international marine transport, multiple rail options, as well as a seemingly endless availability of pipelines.

It is easy to repurpose and expand the legacy infrastructure this vast system incorporates while also building the least amount of new infrastructure possible. That is not to say that the new infrastructure is cheap or limited. It is not—it just requires less build-out than in places such as the Northeast, which has traditionally been a demand center and not a supply center. Consequently, there is a limited amount of storage, fractionation and cracking capacity.

The vast amount of infrastructure along the Gulf Coast makes it relatively quick for the industry to respond ahead of time to situations such as the oversupply of propane, which led to a price depression. Midstream operators such as Enterprise Products Partners, Targa Resources and Phillips 66 were quick to make plans to build LPG export terminals to alleviate this situation.

Enterprise began exporting volumes from its expanded terminal on the Houston Ship Channel in March 2013 and reported $16 million in operating gross margin for fiscal 2013 and is continuing to expand offerings to relieve the product glut in the region. The company is also increasing its capacity to export LPG to 9 million barrels (bbl.) per month via several dock expansions.

This includes the construction of a refined product export dock in Beaumont, which is scheduled for completion in the second or third quarter of this year. The company also increased fractionation capacity in Mont Belvieu to nearly 700,000 bbl. per day.

“We’ve still got a lot of folks that we’re negotiating with on LPG exports. We haven’t seen a slowdown,” Jim Teague, the company’s chief operating officer, said during a January conference call to discuss quarterly earnings.

“Exports create markets that enhance production. I’m not sure we would’ve seen the sort of NGL production growth in the U.S. if producers weren’t comfortable there was a market for their product. It is one heck of a bridge, and it enhances their production,” he continued.

Targa is in the midst of a $480 million expansion of its Galena Park LPG export terminal, outside Houston, that is scheduled to be completed in the third quarter of this year. This expansion will increase export capacity to 6 million bbl. per month.

Heating up

At the start of the winter of 2014, propane storage levels were trending at five-year highs, but by the end of the season they had reversed. Much of this was due to Arctic weather systems making their way south into the Lower 48 states; otherwise, storage levels were set to reach five-year average levels.

In addition, the Gulf Coast midstream infrastructure almost single-handedly helped to turn around the price spike that saw propane average nearly $5 per gallon, nearly four times its normal price, in early February. By the end of the month, the midstream was able to drive this price back under $1.50 per gallon by shipping enough propane to the Midwest and Northeast even as temperatures remained below normal levels. But this isn’t anything new—in fact, the midstream’s ability to divert supplies of hydrocarbons to locations where they are most needed/profitable is par for the course.
It is often taken for granted by utilities, consumers and petrochemical producers just how important the network of systems in the Gulf Coast is to the country’s economy. One need only look at the constant gas and oil price spikes in Europe, or New England for that matter, to see a difference.

Both parts of the globe are lacking in crucial infrastructure, such as pipeline and storage capacity, which increases their dependence on the spot market. As high as gas prices rose in the Midwest and Northeast following the polar vortex, they were much higher in New England.

During the polar vortex in mid-January, various hubs in the Northeast and Midwest saw gas prices skyrocket to more than $70 per million Btu (MMBtu) in New York City and to $100 per MMBtu in parts of New England as demand for electricity increased dramatically.

Although transportation to New England is constrained, virtually every other avenue is open out of the Gulf Coast as the market’s storage, and export capacity is the best in the world. “We’ve got more export capacity and more coming online in the future, so we have a way to get propane out fairly quickly,” Fasullo says.

Northeast production

This remains the case going forward even as the Northeast produces more propane out of the Marcellus and Utica shales due to the lack of storage in the region. Propane demand can be three times as high during the winter as the summer.

There is a large amount of salt dome gas storage capacity at Mont Belvieu and the Midcontinent Conway, Kansas, NGL hub, but NGLs have to be flushed out of the Northeast during the summer because of the lack of storage capacity. This also means that propane has to be transported back to the Northeast—from the Gulf Coast—during the winter when heating demand reaches its peak. Producers could shut in production during the summer, but this reduces the efficiency of the well.

Propane can be exported out of the Northeast via the Gulf Coast or through the Marcus Hook or Mariner East facilities on the Delaware River. This helps to ease the pressure of building oversupplies in both the Northeast and Gulf Coast by keeping storage at capacity rather than an overhang. Two years ago, the Midcontinent faced a large oversupply of propane, but once Y-grade (mixed NGL) pipelines to Mont Belvieu were built, this surplus was able to be exported, with record-setting prices reported at the hub.

Fasullo says that while the market is being overwhelmed by large butane volumes being fractionated along the Gulf Coast, available export capacity is relatively high as butanes can be exported outright at the LPG export terminals or be blended into gasoline that is being exported.

Transportation capacity for natural gasoline is also being expanded through the TEPPCO and Explorer pipelines as well as the reversal of the Cochin pipeline. More companies are likely to repurpose existing gas and refined product pipelines to transport Marcellus/Utica NGLs to the Gulf Coast. Fasullo also notes that natural gasoline can be exported
via marine transport.

The ethane problem

This leaves ethane as the lone NGL having constrained export capacity, both currently and in the near term. Not surprisingly, it has been the weakest performing NGL with negative frac spread margins for much of the past 12 months throughout the U.S.

Ethane has been oversupplied to the market for the past two years because the NGL-rich shale gas being produced contains more ethane than conventional resources.

Unlike propane, which has heating, agricultural fuel uses, petrochemical demand and can be exported, ethane’s sole demand center is the ethylene market. Both the manufacturing and petrochemical industries are expanding in the U.S., but their growth has trailed ethane production.

To alleviate this situation, Enterprise Products Partners’ executives have said several times that it is considering the construction of an ethane export terminal, likely at Beaumont because of extra dock capacity. There are currently no terminals along the Gulf Coast designed specifically to export ethane, but the process is similar to other export facilities and has been under consideration by the company for several years. According to Teague, Enterprise is working to convince sponsors to support the project, similar to its history with other export terminals.

Targa is also considering such a facility, but the company’s chief executive, Joe Bob Perkins, said the difficulty is trying to find overseas customers willing to contract for supplies at Mont Belvieu prices. “If we receive such a contract, we would undertake such a project, and it would take about three years to complete after the announcement,” he said during a February conference call to discuss fiscal year 2013 earnings.

“I think they’re [Enterprise] just waiting to get all the contracts signed with the potential foreign petrochemical players that might start loading ethane onto ships and take it overseas either to Europe or Asia,” Fasullo says.

Sponsors needed

The real difficulty is in obtaining petrochemical sponsors for such a project to ensure its profitability. Sunoco Logistics’ Mariner East project will begin to export ethane by 2015 and is sponsored by INEOS for ethane export to Europe. Fasullo says that a similar project along the Gulf Coast would likely require one or more large foreign petrochemical sponsors that would need to convert their naphtha crackers to handle ethane.

“You can’t just build an ethane export terminal and ship that ethane any place. It has to be to dedicated places that have the logistical ability to handle that ethane and crack it. You have to marry up the export terminal with the petrochemical companies or company,” he adds. Unless such a facility were to be built, the market will remain constrained until 2017, when new ethane crackers come online in the Gulf Coast.

Interestingly, once these new Gulf Coast ethylene facilities come online, it could create the need for even more infrastructure there. As companies build new crackers and the fractionators to supply ethane to these crackers, the rest of the NGL barrel being fractionated will need to find homes. In many cases, midstream companies are developing export terminals to handle the rest of the NGL barrel, Fasullo says.

New horizons

The expansion into Corpus Christi is creating new opportunities for companies to enter the midstream, including Trafigura AG, which has primarily been an energy trader and is currently one of the three largest global oil traders. The company began operations in the U.S. by importing West African crude, but during the past decade, Trafigura has become increasingly focused on assets.

“We want to physically own the infrastructure in order to increase our position in the amount of commodities we’re trading,” Kevin Beasley, project manager at Trafigura AG, tells Midstream Business. One of the first examples of this strategy was through the company’s offerings in the coal industry. Trafigura owned the entire supply chain—from its mines, transport on its own ships through a terminal it owned, discharge to a terminal it also operated at its final destinations and to its own customers. This strategy is pretty easy to transfer over to the oil and gas industry.

“Beginning in 2010, we realized our U.S. customers didn’t need or want to buy foreign crude because they were getting a lot of domestic crude out of South Texas,” he says. Company officials saw that barges and vessels were coming out of South Texas full of crude oil.

Trafigura began to look for a way to capitalize on this new production and noted that Corpus Christi was an ideal location to do business, but there weren’t a lot of third-party terminals. The company contracted with a local terminal owner to offer barge-to-truck loading.

“It takes 400 trucks to fill a barge, so it is a very slow, not very efficient business,” Beasley adds. Trafigura decided to acquire the 90-acre site and build tanks to transport crude from Corpus Christi to the St. James terminal in Louisiana as well as other part of the U.S. and Canada.

The company is now in the process of a more than $200 million terminal expansion to reach other locations by adding more than 1 million bbl. of storage and new docks capable of handling VLCC (very large crude carrier) and Suez Canal-rated Suezmax tankers. Once fully operational, the facility will be able to handle more than 200,000 bbl. per day of crude.

To ensure volumes for the company’s new infrastructure, in November 2013, Trafigura contracted with Energy Transfer Partners for oil and condensate transportation capacity on its 82-mile pipeline system from McMullen County, Texas, to Corpus Christi. This 10-year contract provides Trafigura with 100,000 bbl. per day of capacity on the system.

“Now we have a way to get oil from the production area to market in a more efficient way. Previously, a lot of the oil was transported by truck. It’s a lot easier and safer for pipeline to handle these volumes than trucking it,” Beasley says.

Because of U.S. restrictions on crude exports, C₅₊ is the lone NGL product that Trafigura is exporting to international markets. In 2013, the company transported 600,000 bbl. per month of diluent to Colombia. The company is also in the process of developing a system to export 100,000 bbl. per month of butane and isobutane from Corpus Christi.

Beasley tells Midstream Business that the company considered the possibility of exporting ethane, but found the economics are challenging.

“We’ve looked at it a couple of different times, but it’s tough from a capital perspective. We have plenty of ethane, but you’re more or less creating an LNG plant for that ethane. I like the idea and eventually some company will do it, but it’s a big-ticket project.”

LNG projects coming online

In 2011, Cheniere Energy’s Sabine Pass LNG terminal in Cameron Parish, Louisiana, became the first facility to secure a license to export LNG from the U.S. to countries without free trade agreements (FTA).

The company also filed for a license to export volumes to non-FTA countries from its Corpus Christi LNG terminal, which is currently under construction. It is now No. 3 in the queue and hopes to have a decision soon.

Katie Pipkin, Cheniere’s vice president of corporate communications, tells Midstream Business that a year after the company completed the permitting and design processes for Sabine Pass, it began work on the Corpus Christi project. Securing the necessary contracts from foreign LNG users and marketers to back the project took some time with BG APA signing the first contract for capacity at the terminal.

This facility will export up to 4.5 million tons per year of LNG and recently marked an important milestone in its development when the Port of Corpus Christi celebrated the completion of the La Quinta Channel Extension Project in February at the La Quinta Trade Gateway.

The extension of the La Quinta Channel consisted of extending the La Quinta Ship Channel approximately 1.4 miles to a depth of 41 feet; construction of an ecosystem restoration feature; and creation of a breakwater and shallow water habitat beneficial use site.

La Quinta Trade Gateway Terminal is located on a 1,100-acre greenfield site on the north side of Corpus Christi Bay. When completed, this fully permitted project will include deep-water access (45 feet) and provide a state-of-the-art multipurpose dock facility, construction of a 3,600-foot channel frontage, 150 acres of container/general cargo storage yard and intermodal rail.

Although delays on the Panama Canal would increase shipping costs for Asian LNG buyers, Pipkin says that it would not have an impact on Cheniere’s Corpus Christi LNG terminal.

“We have contracts for the first four trains that are under construction. The customers will purchase LNG from the terminals on an FOB (free on board) basis, meaning they will use their ships to pick up LNG from our sites,” she says.

LPG now, LNG then

However, the exporting of LNG out of the Gulf Coast will take several more years to begin, while the exporting of other liquids has already begun. In many ways it appears that LPG exports have taken the lead on LNG exports, but that’s not likely to last for too much longer given the uptick in U.S.-granted export licenses to countries without free trade agreements.

These export terminals will provide gas producers with a necessary outlet for record volumes coming out of the shale plays. But one question that is beginning to get raised is the possibility that U.S. LNG exports could head down a path similar to the Australian LNG industry.

Australia has built several LNG export terminals that have been designated for so much of the country’s gas supplies that the domestic market is now suffering dramatically, according to Tim Lawrence, manager, gas, energy and utilities at Australia-based Incitec Pivot, a global manufacturer of commercial fertilizers and explosives.

Thus far, export capacity that has been granted for U.S. LNG terminals won’t exceed current demand levels, but domestic demand is expected to increase in the coming years from new petrochemical, ammonia and methanol plants. In addition, more utilities are switching from coal-fired to gas-fired generation and exports to Mexico are also expected to increase in the coming years.

What about the increase in demand for natural gas exports to Mexico in the coming years? Recent energy reforms in that country will open up new oil and gas reserves, but these measures will take years to come to fruition, according to observers. In the meantime, Mexico will be a major importer of both gas and propane from the U.S. for the next 10 to 15 years.

In the U.S., exports are more based on market dynamics than in the rest of the world, as evidenced by the drastic downturn in LPG exports in late January and February when propane demand increased dramatically. It is safe to assume that if domestic natural gas demand were to increase at a similar rate, LNG exports would dwindle to ensure supplies remained in the U.S.

“It’s too early to tell exactly how exports will affect the market. I happen to think it’s more of a positive impact on the market in the sense that it prevents extreme price collapses to occur. Having the ability to export natural gas will prevent gas going down to $2 [per MMBtu], or prevent propane prices from getting excessively low. This is a good thing because when you shut down supply due to poor production economics, you’re more exposed to have shortages.

“Just because an export terminal is built, doesn’t mean it will automatically operate at 100% capacity. We could oversaturate the market with too much export capacity, but that doesn’t mean we will. I certainly wouldn’t advise any midstream company to build export capacity without having it contracted out,” Fasullo concludes.

Frank Nieto can be reached at fnieto@hartenergy.com or 703-891-4807.