CHAPTER 1 PRODUCTION AND MARKETING OF HYDROCARBONS IN THE U.S. - A SURVEY OF RECENT TRENDS AND DEVELOPMENTS
| Jurisdiction | United States |
(Feb 2011)
PRODUCTION AND MARKETING OF HYDROCARBONS IN THE U.S. - A SURVEY OF RECENT TRENDS AND DEVELOPMENTS
Black & Veatch Corporation
Houston, Texas
FRED D. HAGEMEYER is Managing Director and Oil/Gas sector lead for Black & Veatch Management Consulting. He has 37 years of energy industry and consulting experience in executive leadership positions with the majority of his experience in corporate finance, oil & gas marketing, mergers & acquisitions, risk management, and regulatory affairs. He was a Principal at Lukens Energy Group before they were acquired by Black & Veatch in 2005. At Black & Veatch, he has worked with clients on strategy development, regulatory policy, marketing and portfolio optimization, economic and financial evaluations, litigation support and contract negotiations. Prior to Black & Veatch, Fred was an executive with Marathon Oil Company where he held management positions in the Upstream, Midstream and Downstream Sectors, including Exploration and Production, Finance and Marketing. During his career, he has been active in oil and gas trade associations and testified on several occasions before Congress. Fred earned an M.B.A. degree in Finance (1984) and a B.S. degree in Computer Science (1974), both from Bowling Green State University.
I. INTRODUCTION
A. Summary of Recent Trends and Developments
1. Some describe the current era as the beginning of a paradigm shift in the production and marketing of oil and gas. That is indeed a bold prediction and will ultimately be debated by historians as they reflect on this period in the oil and gas industry. Whether it is really a paradigm shift may be debatable. However it is clear that in recent years we have experienced major shifts in the world of oil and natural gas that have created some unique challenges and opportunities. Five years ago, conventional wisdom suggested that the U.S. hydrocarbon resource base was peaking and poised for a long-term decline. The level of crude oil imports had reached historic levels and we were facing increasing reliance on major imports of natural gas. The debate was centered on the implosion of the merchant energy business in the first half of the decade and new business models that may emerge.
2. Ultimately, future trends in the oil and gas business will be defined by both regional and world supply and demand factors. Not many have been proficient at predicting the boom and bust cycles in oil and gas, nor the short-term economic events that can shape strategic decisions. For example, no one predicted crude oil would be trading over $140 per barrel in mid-2008. The events occurring during 2004-2008 produced a perfect storm with seemingly insatiable demand for crude oil as part of an overheated world economy, especially in growing economies such as China and India, along with a disappearance in excess production capacity. In response to the convergence of these events, oil prices moved from a price range of $20-$40 per barrel early in the decade to $80 to $100 per barrel in the last five years.
3. A recent trend suggests that world oil prices are driven by marginal demand rather than by the cost of production, which assumes that hydrocarbons are not replaced anytime soon as the primary transportation fuel. This structural change in crude oil pricing has fueled expansion of relatively high cost oil production in the U.S. and Canada. This trend includes the expansion of crude oil production in the Alberta oil sands, deepwater Gulf of Mexico, and the explosion of activity in oil shale plays, such as the Bakken shale in North Dakota. These production areas have potential for significant new "domestically" sourced oil. However, major investments will be required in production assets and transportation capacity to consuming markets in
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the Midwest and Southern U.S. These trends can reverse the decline in U.S. oil production. Forecasts indicate a growth of U.S. production from five million to six million barrels per day.
4. In contrast to oil, natural gas is now viewed by many as the "clean fuel" and is proclaimed as the bridge fuel to the future. Total natural gas production in the U.S. has grown from about 50 billion cubic feet (Bcf) per day to almost 60 Bcf per day over the last five years. This tremendous growth in domestic production is due primarily to shale gas. The prolific development of shale gas in the U.S. is often referred to as a "game changer." Horizontal drilling advances along with new hydro-fracing techniques have unlocked a tremendous domestic energy source. Over the last five years, shale gas production has increased over 500%. The recent concern is not about the supply of natural gas, rather the question is what will drive the demand.
5. As a result of the surge in gas production from regional shale basins there has been a rush to acquire shale properties and develop cutting edge technology in producing shale gas. Several of the shale basins are closer to major consuming markets than conventional gas basins. This is driving a new trend in physical gas movement and commercial contracting in the U.S.
6. De-linking of oil and gas prices is a recent trend that drives a rush to liquids and NGL markets as part of a short and midterm strategy, while setting the stage for advancement of a broad gas market. Historically, we experienced a fairly tight band around the oil/gas price relationship in the range of six or seven to one. This was partly due to the relative Btu content of the two commodities and also their common cost structure associated with finding and development costs. Over the last several years, we have experienced oil-to-gas ratios of 20 to one. This is partly accounted for by the development of huge stranded gas reserves and expanded production capacity, while crude oil has restrained production capacity. This trend can drive separate oil and gas strategic plans, such as the move to higher Btu content wet gas in order to extract the higher value liquids. This, in turn, requires an expansion in midstream assets to accommodate the increased NGL's.
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7. These major trends suggest that we are entering into a future driven by high commodity prices for oil and transportation fuels while the abundance of affordable natural gas in the U.S leads to an even more sustainable "Natural Gas Age." If these developments are not a paradigm shift, then they certainly establish a "New Normal" for oil and gas market participants.
B. The Value Chain for Oil
The crude oil value chain is traditionally broken down into the following stages:
1. Production - Flowing oil through the well bore for disposition off the lease site.
2. Gathering - Moving oil by pipeline from the lease to the points downstream.
3. Transportation - Transportation involves movement of the oil downstream of gathering facilities for refining. Large diameter pipe or crude carrying vessels move the oil over greater distances.
4. Marketing - Marketing involves entering into contracts to buy and sell oil. Oil markets exist at all points along the value chain, from the lease to the delivery points at the facilities of end users. It is common for a unit of oil to be bought and sold multiple times as it moves from the lease to the location of final consumption, typically by a refinery.
5. Refining - The process of converting and manufacturing hydrocarbons, such as crude oil, into finished petroleum products.
C. The Value Chain for Natural Gas
The natural gas value chain is traditionally broken down into the following stages:
1. Production - Flowing gas through the well bore for disposition off the lease site.
2. Gathering - Moving gas by pipeline from the lease to the points downstream.
3. Treating - Treating involves removal of water, inert gases or other contaminants from the stream to render it acceptable to third party pipelines. Treating can be done on the lease or at a common facility in the production field.
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4. Processing - Processing involves removal of some or all of the heavier hydrocarbons that may be entrained in production. Processing can be accomplished during the gathering phase or during the transmission phase.
5. Transportation - Transportation involves movement of the gas downstream of gathering facilities for re-delivery to end use consumers or LDC's. Transmission pipelines typically operate at higher pressure than gathering lines, are constructed of larger diameter pipe, and move gas over greater distances.
6. Marketing - Marketing involves entering into contracts to buy and sell natural gas and oil. Gas markets exist at all points along the value chain, from the lease to the delivery points for end users. It is common for a unit of gas to be bought and sold multiple times as it moves from the lease to final consumption
D. The Value Chain for Natural Gas Liquids (NGL's)
The NGL value chain intersects with the natural gas value chain at several stages.
1. Production/transportation - NGL's are produced in conjunction with the production of natural gas and may, as liquids from the gas stream in the gathering or transmission pipeline, drop out naturally due to pressure, temperatures, or elevation changes. NGL's can be removed from the pipeline at slug catchers or other liquid separation equipment operated by the pipeline.
2. Processing - NGL's are extracted from the wet gas stream through operation of gas processing equipment. Such equipment manipulates pressure and temperature of the gas to extract NGL's. Gas processing equipment may be owned by the gathering or transmission pipeline, by the producer, or by third parties that operate gas-processing equipment for a fee.
3. Fractionation - NGL's may be further processed at a fractionation plant to break down the NGL's into "purity" component parts including ethane, propane, butane, iso-butane, and pentanes.
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