Shale's Need For Midstream

Increased oil and gas production across every major U.S. shale play has created strong demand for new or expanded infrastructure. How long will the trend continue?
By Luke Geiver | February 09, 2018

Jeff Dorrow remembers office visits with oil producers to talk about the merits of a 700-mile pipeline starting in the Permian and terminating along the Texas Gulf Coast when West Texas Intermediate was priced at $26 and a minimum volume commitment to be on the pipeline was a dirty phrase.  Dorrow, vice president of commercial operations for EPIC, a crude oil and natural gas liquids midstream operator, knew that when rising prices collided with new technology across the greater Permian Basin, contractual talks for long-haul pipeline commitments would turnout much differently. By the end of 2017, Dorrow and his team announced plans to build that 700-mile crude line—along with another NGL pipeline spanning more than 650-miles—after receiving ample shipper commitment from multiple E&Ps. “We knew just how good the rock was in the Permian,” Dorrow says, “and that it was just a matter of time.”

Although Dorrow believes certain elements of the EPIC story are unique, he also knows that his team is only one part of a significant moment in the near-term time  line of shale. As oil prices have gradually risen the past two years, activity levels across North America have either stabilized or risen. Production levels in most shale plays are now rising and in nearly every region, areas that were once adequately supplied with crude or gas or NGL gathering and takeaway capacity at a time of lower oil prices are now teetering toward—or are at—the point of gathering and takeaway undersupply.

In May, Morningstar Commodity Research predicted what was to come for shale as oil prices, rig counts, laterals, completion stages and production numbers all continued to tick upwards. “If output continues to sure at current rates,” the company said in a research report to investors, “then even more takeaway capacity expansion will be needed as early as next year.”

In mid-2017, headlines of new midstream projects located in the Permian, the DJ Basin and the Marcellus began, and have remained consistent. While Dorrow says the midstream gathering, takeaway and long-haul businesses are certainly competitive right now, he shares the same view offered by most of the headline makers of the past six months: Despite all of the newly announced projects, shale needs more infrastructure.

Bringing an EPIC Permian Project To Life
The EPIC team knew their pipeline projects would become successful when oil prices began to turn positive. With several other shale plays yet to regain economic viability when oil was in the $40 range, the Permian was holding steady. With production volumes stable in the Permian even under the run of skeleton crews, Dorrow and his team knew that once prices rose further or new technology capable of lowering breakeven costs was deployed on a greater scale, everyone would realize that the Permian was going to run out of crude takeaway capacity.

Because the pipeline projects EPIC was proposing required more than a year of lead time, it still wasn’t easy to get producers to see the future at first. To help producers become part of the EPIC pipeline, the team created a unique offering. According to Dorrow, EPIC has created a co-op structure for the initial shippers signed up for the pipeline. Typically, shippers committed to a pipeline must pay deficiency payments when they fail to provide their committed volumes to the pipeline. However, because the EPIC line is set-up like a co-op, the initial folks who sign-up to ship crude will not be subject to deficiency payments, Dorrows says. “Our group believes in the Permian. We believe that at no point will our pipeline ever be less than a third full.”

Those same initial shippers will also hold an equity stake in the pipeline. In addition to the co-op structure, the EPIC team is not forcing shippers to use specific connection points at the pipeline’s terminal location near Corpus Christi. “The flexibility of the structure had a lot to do with getting people to sign up,” Dorrow says.

In addition to the crude project, the company has also made plans to build a NGL line. As the Delaware play expands, the lighter the barrels are going to get, based on the volumes of NGLs present in the production streams there, Dorrow adds. “NGLs are really starting to become a constraint on production. No matter where it is, there is less than ideal amounts of infrastructure for production,” he says. “Continued expansion of these assets is necessary.”
Author: Luke Geiver
Editor, North American Shale magazine