opening global markets to booming u.s. shale gas and ngl production
DESCRIPTION
ICF International experts join an industry expert from Vinson and Elkins, LLP to discuss the boom in shale gas and natural gas liquids (NGL) production. Key topics covered include: • Marketing issues created by the boost in production • Outlook for gas supply development • Regulatory and contractual considerations that shape infrastructure development investmentsTRANSCRIPT
Vinson & Elkins and
ICF International Welcome You
June 25, 2014
Opening Global Markets to Booming U.S. Shale Gas and NGL Production ICF International – Vinson & Elkins Houston Energy Breakfast
June 25, 2014
1
Today’s Agenda
Introductions
Market Outlook – Greg Hopper
Regulatory & Contractual Considerations – James Olson
Q&A
2
ICF Leaders and Subject Matter Experts
Kevin Petak VP and Head of Fundamental Analysis
Michael Sloan Principal and NGL Markets Practice Leader
3
NGLs and Midstream Investment – Good Times
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Pr
ice
Ratio
WTI/Henry Hub Price Ratio
4
Natural Gas, Oil, and NGL Production – ICF Base Case
U.S. and Canadian Natural Gas Production (Average Annual Bcfd)
U.S. and Canadian Liquid Production Average Annual Million Barrels per Day (Bbl/d)
NGL production grows 3.2% per year. Gas production rises 1.8% per year
5
Recent Growth of NGL Production
Most of the growth is in light products: 47% Ethane; 29% Propane
36% Growth – 2009 to 2013
6
NGL Production by Basin – ICF Base Case
0
1,000
2,000
3,000
4,000
5,000
6,000
MBPD
Western Canada ShalesOther U.S. UnconventionalMarcellus + UticaE. Texas & OklahomaEagle FordBakkenRockiesConventional
7
NGL Fractionation (Bcfd) – ICF Base Case
0.0 0.0 0.0 0
1
2
3
2011 2025 2035
Arctic
0.6 1.0 1.1
0
1
2
3
2011 2025 2035
Canada
0.1 0.1 0.1 0
1
2
3
2011 2025 2035
Western
0.2 0.3 0.4
0
1
2
3
2011 2025 2035
Central 0.1
0.5 0.5
0
1
2
3
2011 2025 2035
Midwest
0.0 0.3 0.4
0
1
2
3
2011 2025 2035
Northeast
1.8 3.4 3.9
012345
2011 2025 2035
Southwest
0.0 0.1 0.1 0
1
2
3
2011 2025 2035
Southeast
0.0 0.0 0.0 0
1
2
3
2011 2025 2035
Offshore
U.S. and Canada fractionation rises to 6 million barrels per day by 2035.
8
Propane Supply / Demand Balance
0
500
1,000
1,500
2,000
2,500
3,000
MBP
D
Additional Export Capacity
Planned PDH Capacity
Existing PDH Capacity
Baseline Export Capacity
Baseline Cracker Demand
Consumer Sector Demand
Propane Supply + Butane Exports
ICF Base Case
If all export capacity is built, it will result in an “overbuild” with propane supply falling below market potential.
9
NGL Supply/Demand Balance in the Marcellus/Utica Area
Local Propane Demand
Unity Pentanes+
Mariner West Ethane
ATEX Ethane
Mariner East Propane
Mariner East Ethane
ATEX Propane
Bluegrass Y-Mix
Utica/Marcellus TX Pipeline (TGP) Y-
Mix
Mariner East 2 E/P/B Mix
Utopia E/P Mix
Proposed Appalachia Cracker
-
200
400
600
800
1,000
1,200
1,400
1,600
MBP
DICF Base Case
Projects and production in relatively close balance over next 5 years, but some projects are uncertain.
After 2020, more capacity (incremental market growth) will be needed.
Specific timing of development will affect the amount of ethane rejection, but there are limits on the amount of ethane rejection that can occur.
10
NA Ethane Supply to Outpace Demand
The impact of falling prices has offset the value of production growth; value to producers has increased by just 4% and at times Mont Belvieu ethane has traded at a negative ‘frac’ spread to natural gas. “
[SERIES NAME]
[SERIES NAME]
0
500
1,000
1,500
2,000
2,500
3,000
3,500
MBP
D
Odebrecht/Braskem Lubeck, WV
SABIC , TX/LA
Indorama Ventures , TX/LA
Sasol Lake Charles, LA
Mexichem/OxyChem Ingleside, TX
Dow Chemical Freeport, TX
Chevron Phillips Chemical Baytown, TX
Aither Chemical Charleston, WV
Formosa Plastics Point Comfort, TX
ExxonMobil Baytown, TX
Dow Chemical Freeport, TX
Westlake Lake Charles, LA
BASF-TOTAL Port Arthur, TX
Sunoco Export Terminal Marcus Hook, PA
Westlake Calvert City, KY
LyondellBasell Laporte, TX
Dow Chemical Plaquemine, LA
LyondellBasell Channelview, TX
Williams Geismar, LA
Nova Chemicals Corp. Corunna, ON
High Recovery Case
ICF Base Case
Low Recovery Case
Cases derived by assuming
different levels of ethane rejection.
11
Recent U.S. Propane Exports
Total U.S Export Capacity is now 6.6 billion gallons annually.
2014 expansions are expected to add another 2.5 billion gallons.
12
Operational and Planned LPG Export Capacity
Enterprise Debottlenecking
Enterprise Expansion
Targa Refrigerated Terminal Phase I
Targa Refrigerated Terminal Phase II
Sunoco Marcus Hook Terminal
Oxy Corpus Christi Terminal
Enterprise Expansion
Sunoco Nederland Terminal
Pembina (Canada) Terminal
Enterprise Expansion
Williams/Boardwalk Terminal
Phillips66 Freeport Terminal
Sage Midstream Longview Terminal
13
NGL Flows to 2035 – ICF Base Case
14
North America Midstream Capital Expenditures
Source: ICF Midstream Infrastructure Study for INGAA
15
Natural Gas Liquids Capital Expenditures
Source: ICF Midstream Infrastructure Study for INGAA
Thank you. Greg W. Hopper [email protected] 713.445.2024
©2014 Vinson & Elkins LLP Confidential & Proprietary
Opening Global Markets to Booming U.S. Shale Gas and NGL Production
June 25, 2014
V&E – ICF International Houston Energy Breakfast
©2014 Vinson & Elkins LLP Confidential & Proprietary
Infrastructure to Get Natural Gas and NGLs to Domestic and International Markets: Regulatory &
Contractual Considerations
• Gas Gathering/Processing
• Gas & NGL Transport
• LNG & NGL Terminals
Overview
2
©2014 Vinson & Elkins LLP Confidential & Proprietary
Introduction
3
• Shale production has revolutionized oil and gas industry in US
• Natural gas and NGL markets are flooded – Transportation Constraints – Need for Exports
©2014 Vinson & Elkins LLP Confidential & Proprietary
Gas Gathering – Regulatory Issues
4
• Exempt from FERC jurisdiction
• Modified Primary Function Test – Physical Factors: (1) length and diameter, (2) central
point in the field, (3) geographic configuration, (4) compression and processing, (5) location of wells along the line, and (6) operating pressure
– Non-Physical Factors
©2014 Vinson & Elkins LLP Confidential & Proprietary
Gas Gathering – Contractual Issues
5
• Dedications
• Obligation to Construct
• Standard of Service
• Price
• Term
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Processing/Fractionation
6
• Not Regulated
• Contracts – Dedications – Standard of Service – Allocations – Price – Term
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Natural Gas Transport - Regulatory
7
• Jurisdiction – Intrastate
• Hinshaw • NGPA Section 311
– Interstate • Construction – NGA Section 7 • Rates – NGA Sections 4 & 5
©2014 Vinson & Elkins LLP Confidential & Proprietary
Natural Gas Transport – Contractual Issues
8
• Volume & Anchor Shipper/Foundation Shipper Status – Priority – Rate Certainty/MFN
• Firm/Interruptible
• Price
• Receipt/Delivery Points
• Term
©2014 Vinson & Elkins LLP Confidential & Proprietary
NGL Transport – Regulatory Issues
9
• Jurisdiction – FERC has jurisdiction under ICA for interstate movements – Fixed and persisting intent of the shipper
• Common Carriage
• Open Seasons & Declaratory Orders
©2014 Vinson & Elkins LLP Confidential & Proprietary
NGL Transport – Contractual Issues
10
• Deficiency Payments/Volume Commitment
• Quality of Service – Firm Service – Historical Prorationing
• Rate
• Origin & Destination Points
• Term
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG & NGL Export Terminals – Regulatory and Contractual Issues
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG & NGL Export Terminals – Regulatory Issues
12
• LNG Terminals require FERC or MARAD authorization – No tariff, no open access requirements – Environmental review
• NGL Export Terminals generally not jurisdictional under ICA – Storage and terminalling generally not jurisdictional – Except if integrated or necessary to transportation, such as
breakout tanks
• Export of LNG requires approval from DOE Office of Fossil Energy
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG and NGL Export Terminals – Basic Commercial Structure
13
• LNG export terminals: – FOB Sales of LNG: Sabine Pass – Tolling – liquefaction services
• Receipt of natural gas at inlet • Liquefaction and limited storage • Loading on vessels
• NGL export terminals: – Traditional: terminal buys product and sells FOB – New terminals: tolling – terminalling services
• Receipt of liquids, often in batches • Limited storage as necessary for terminalling • Loading onto vessels (and possibly rail/trucks/pipelines)
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG and NGL Export Terminals – Key Provisions of Tolling Agreements
14
• CPs – Permits and authorizations
• LNG: Export authorization for non-FTA countries – FID – Pipeline – Commercial Start
• Commercial Start – Window notice mechanism but commercial start is not absolute – No delay damages for late start – Termination right for missing long stop date, sometimes with and
sometimes without damages
Timing
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LNG and NGL Export Terminals – Key Provisions of Tolling Agreements cont.
15
• Term/extensions – Initial term 10-20 years – Extensions may be limited and subject to full capacity
being booked for all customers
• Termination – Extended failure to provide service – Extended Force Majeure
• Rights to expansion capacity
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG and NGL Export Terminals – Key Provisions of Tolling Agreements cont.
16
• Customer’s Obligation: Send or Pay • Fee during services unavailability:
– Caused by Operator – Caused by Other Customers – Caused by Customer – Resulting from Force Majeure
• Affecting the terminal • Affecting Customer’s ability to use the terminal
• Adjustment for capital cost over/under • Fee Mitigation
– Banked volume – Make-up volume
• Change in Law – New regulatory costs and taxes – Threshold or deductible – Possible sharing of costs – How to design incremental rate
• Credit support
Toll / Fee
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LNG and NGL Export Terminals – Key Provisions of Tolling Agreements cont.
17
• Receipts and deliveries: – May have bidirectional ability, import and export. – Priorities?
• Inventory management: – May need to load vessel when Customer inventory has not reached cargo
size – Limits may be imposed on how far negative inventory Operator will allow –
must not interfere with subsequent loadings – Settling inventory positions
• Operator liability for shortfall/service unavailability – May be limited to excuse of fee – Direct damages? – Threshold
• Terminal manual • Non-discrimination • Off-spec input, output
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LNG Export Terminals – Particular Issues
18
• Gas pipeline interface – Gulf Coast: header pipeline connecting to existing pipeline
network – Other locations: mainline capacity may be lacking – Pipeline imbalances when Operator calls for changes in supply – Control of feed gas
• Loss of non-FTA export authorization – Due to Operator – Due to Other Customers – Due to Customer
• Ship-loading schedule
©2014 Vinson & Elkins LLP Confidential & Proprietary
LNG Export Terminals – Particular Issues cont.
19
• Cross-customer concerns in LNG Export Terminals – Failure to deliver feed gas – Failure to lift (tank tops) – Contamination of feed gas – Contamination of LNG inventory – Borrowing/lending of inventory
• Inter-customer agreements – May not be feasible to achieve – Customer base subject to change over time
©2014 Vinson & Elkins LLP Confidential & Proprietary
NGL Export Terminals – Particular Issues
20
• Storage rights: – Usually limited to what is necessary for receipt and loading. – Maximum storage volume and duration allowance.
• Scheduling: – NGLs terminals may hold different products and vessels may be able to
lift different products to different tanks – Object is to maximize throughput, such as by giving loading priority to
customer with highest inventory position – Single customer terminals are far simpler
• Receipts and deliveries: – May receive and delivery by multiple modes (pipeline, truck, vessel, rail)
• Demurrage – Arrival window – Laytime – Rates
©2014 Vinson & Elkins LLP Confidential & Proprietary
James represents clients in: administrative litigation before the Federal Energy Regulatory Commission (FERC) involving the rates charged and services provided by natural gas pipelines and storage facilities; negotiating agreements for service on such facilities and other midstream facilities such as gas gathering and processing facilities and liquids pipelines; negotiating agreements for the purchase and sale of natural gas and liquids; obtaining necessary approvals and/or waivers from FERC and compliance with FERC regulations.
Partner 713.758.4656 [email protected]
James E. Olson
Speaker Biography
21
©2014 Vinson & Elkins LLP Confidential & Proprietary
Gary is a member of V&E's worldwide Energy Transactions and Projects practice group. His practice principally consists of representing owners/developers in major energy transactions and project development/joint ventures. This includes sales and transportation of hydrocarbons and hydrocarbon products, with particular experience in natural gas, LNG, LPG, and other liquids; and pipeline and processing plant development. He also has substantial experience in the regulation of energy and in contracts applicable to regulated energy transactions, including natural gas pipeline and LNG facility certificate, rate, and contractual matters; and oil pipeline rates and terms of service.
Partner 713.758.3435 [email protected]
Gary M. Kotara
Speaker Biography
22