June 2016, Vol. 243, No. 6

Features

2015-35 U.S., Canada Midstream Gas, Oil and NGL Spending to Total $546 Billion

This is the projection in the report, North American Midstream Infrastructure through 2035: Leaning into the Headwinds, conducted by ICF International on behalf of the INGAA Foundation. The new study updates a 2014 infrastructure report to reflect the dynamic changes in the natural gas, NGL and crude oil industry in recent years.

“We saw a need to re-examine infrastructure needs in light of significantly lower commodity prices,” explained INGAA Foundation President Don Santa. “While E&P activity may dip temporarily because of lower prices, we still will need significant capital investment, particularly in natural gas midstream infrastructure.

The study notes that natural gas infrastructure makes up over 60% of the needed energy infrastructure defined in the report, with total investments of between $290-376 billion ($333 billion midpoint) required from 2015-35. Natural gas infrastructure includes gathering and transmission pipelines, compressors, laterals, gas-lease equipment, processing, gas storage and LNG export facilities.

Meanwhile, between $137-190 billion of crude oil infrastructure (gathering pipeline, lease equipment, mainline pipeline and pumping, storage laterals and storage tanks) and between $43-55 billion of new NGL infrastructure (transmission pipelines, pumping, fractionation and NGL export facilities) will be required in the next 20 years.

The study notes that significant questions affecting midstream infrastructure development have been created by sustained low oil and natural gas prices, an uncertain global and domestic economic outlook, and the pace at which public policy will affect energy markets. As a result, for the first time in the report’s 20-plus year history, ICF presents two scenarios: A High Case, which is characterized with a plausibly optimistic case for midstream infrastructure development, and a Low Case, a less optimistic case, in which a slower economic recovery reduces the need for oil and gas and pipeline development.

While the 116-page study is too lengthy to review in detail, the focus of the discussion that follows includes: oil and gas pricing trends; capacity additions; midstream infrastructure expenditures; pipeline miles, pipe diameters and compression outlays; economic impact from midstream infrastructure spending in U.S. and Canada; and estimated incremental expenditure for integrity management and NOx control.

Pricing Trends

The study noted that the cost of West Texas Intermediate (WTI) declined from over $100 bbl in early 2014 to about $40 bbl at present.

The High Case shows an oil price rebound in 2016 before recovering to $75 bbl by 2025. The Low Case assumes oil prices below $40 bbl until 2018 (in 2015 currency) and does not project prices to rise to $75 bbl until 2030.

Like oil prices, natural gas prices have declined as well. While Henry Hub prices averaged close to $4 per MMBtu from 2010-14, these prices recently declined to under $2 per MMBtu.

A robust increase in LNG and Mexican exports is projected to drive prices up between 2017-25 in both cases.

Capacity Additions

The key trends from 2015-35 for this work are summarized as follows:

• U.S. and Canadian natural gas transportation capacity addition is projected at 44-58 Bcf/d for the two scenarios with a midpoint value of 51 Bcf/d.
• U.S. and Canadian NGL capacity addition is projected to be 1.1-2.3 MMbpd for the two scenarios with a midpoint of 1.7 MMbpd.
• U.S. and Canadian oil pipeline capacity addition is projected at 4.5-6.9 MMbpd with a midpoint value of 5.7 MMbpd.

Even though continued infrastructure development is significant, the study projects future midstream development will be less than it has been recently as the market has undergone a robust period of development (i.e., $40-50 billion of annual investment) from 2010-15 with aggressive development of unconventional resources.

In 2016, continued buildout of gas, oil, and NGL infrastructure is expected with many pipelines already under construction. About 40-50% of the natural gas capacity originates in the U.S. Northeast, home to Marcellus and Utica development. Significant capacity is also built in the U.S. Southwest, mostly associated with LNG and Mexican export activity.

The study anticipates a significant amount of natural gas pipeline development during the next five years, with a noticeable drop after 2020, especially in the Low Case where continued market growth is much more modest. Over the next four years (2017-20), the report states Marcellus and Utica transport capacity increases by roughly 12 Bcf/d in the High Case, with substantial increases in capacity to support natural gas exports.

The market growth projected in the two study cases is very different. For natural gas, the Low Case projects usage rising to 110 Bcf/d by 2035, while the High Case sees growth to over 130 Bcf/d. The biggest difference occurs in the power sector where the Low Case assumes increased energy efficiency and significant penetration of non-gas generating resources.

Midstream Infrastructure Spending

This study’s cases show:

• Capital expenditure (CAPEX) for new midstream infrastructure will range from $471-621 billion over the next 20 years (Figure ES-2), with a midpoint expenditure of $546 billion. On an annual average basis, the expenditure is $22.5-30 billion per year.
• Investment in pipelines (including both transmission and gathering lines and compression and pumping) will range from $183-282 billion, with a midpoint CAPEX of $232 billion.

Expenditures by Category

About 30% of the future investment occurs in transmission pipeline development, with the majority being spent for gas pipelines. Nearly 90% of transmission pipeline expenditure is for the pipeline itself, with the remainder being spent on compression and pumping. Investment for gathering systems is also very significant, with about 20% of total investment.

 It is worth noting that an estimated incremental expenditure of $24 billion for integrity management and NOx control as part of the total expenditure on pipelines was provided by the INGAA Foundation for the study. This incremental amount represents additional CAPEX for integrity management activities that were anticipated at the time the study was prepared and emissions control requirements to satisfy new ambient air (NAAQS) standards for nitrogen oxides (NOx). This incremental expenditure should be interpreted as a ballpark estimate because estimated integrity management costs have not been adjusted to reflect the particulars of recently proposed pipeline safety rules.

Pipeline Miles, Pipe Diameters, Compression Outlays

Key projections from the study on pipeline miles, pipe diameters, compression and associated capital expenditures from 2015-35 are summarized below:

• Between 264,000-329,000 miles of pipelines (including both gathering and transport lines) are added (with a midpoint value of 296,000 miles).
• Between 18,000-29,000 miles (midpoint of 23,000 miles) of natural gas transmission lines will be built.
• In total, 30,000-48,000 miles (midpoint of 39,000 miles) of pipelines will be needed for gas, oil, and NGL transport.
• Between 234,000-281,000 miles (midpoint of 257,000 miles) of new gas and oil gathering line will be needed to collect incremental production between 682,000-823,000 new oil and gas wells (midpoint of 752,000 new oil and gas wells).
• Compression for the new gas transmission lines ranges from 4.3-6.2 million hp (midpoint 5.2 million hp).
• Compression needed for new gas gathering ranges from 7.6 to 9.7 million hp (midpoint 8.7 million hp).
• Total compression and pumping needed for all gathering and transmission lines range from 13-18.5 million hp (midpoint 15.8 million hp).
• The total CAPEX for pipelines (i.e., for both miles of line and the total pumping and compression needs) is between $183-282 billion (with a midpoint value of $232 billion).
• About 120-290 Bcf of new working gas capacity, with a CAPEX of $2.3-4.8 billion added (midpoint 3.6 billion).

Economic Impact

The study shows development of new infrastructure will add $655-861 billion of value to the U.S. and Canadian economies and result in employment of 323,000 and 425,000 people per year.

This study, like the 2014 study, projects significant employment impacts from new infrastructure development. Every $100 million of investment in new infrastructure creates an average of about 70 jobs over the projection period and adds roughly $139 million in value to the U.S. and Canadian economies. This result is consistent across each of the study’s cases. The midpoint estimate is that about 375,000 jobs per year will be created with a value added of $760 billion to the economy and $260 billion in taxes. By infrastructure category, investment and employment levels will be most significant for the development of transmission pipelines and lease equipment in both scenarios. Over half of the jobs associated with midstream infrastructure development will occur in the services sector and other categories.

The report notes that all sectors and regions of North America benefit from infrastructure development. The top 10 states in the U.S. with total employment resulting from midstream investment are Texas, Pennsylvania, Louisiana, Ohio, California, New York, Oklahoma, Illinois, Kansas and West Virginia. Texas will have the most significant job creation as a result of LNG export activity and shale gas and tight oil development. Pennsylvania and Louisiana will have similar levels of employment. Pennsylvania’s job creation is driven by Marcellus/Utica development, while Louisiana’s job creation is related to LNG export facility development.

Author’s Note: This article is based on an excerpt from North American Midstream Infrastructure through 2035: Leaning into the Headwinds, conducted by ICF International on behalf of the INGAA Foundation. To review the full study, visit INGAA.org.