January 2017, Vol. 244, No. 1
Features
Survey: Midstream Respondents Try to Retain Optimism
As the oil and gas business tries to come to grips with low natural gas prices by streamlining and investing in new technologies, a new study still found a large majority of those in the industry are optimistic that renewed growth will occur no later than 2020.
Among those responding to Black & Veatch (B&V) survey questions, participants associated with LDCs, and interstate and intrastate pipelines felt most confidence that a rebound would occur relatively soon – surprisingly, oil and gas producers were not far behind.
Overall, 69.1% of the 386 responses reflected “very optimistic” and “optimistic” expectations through 2020, while 70.1% said the same of the period through 2030. Pipeline operators and LDCs were most optimistic at 87.5% and 89.3%, respectively, in the near-term, with oil producers (71.1%), electric generators (67.4%) and oil and gas industry services (60.6%) somewhat less enthusiastic.
“Factors stoking optimism for segments of the natural gas industry are plentiful,” according to the 2016 Strategic Directions: Natural Gas Industry Report. “In North America, local distribution companies are awash in low-cost supplies that are helping to expand natural gas’s use as a source for power generation.”
On the global front, Deepa Poduval, B&V senior managing director of Oil & Gas, anticipates economic recovery and growth in developing countries, especially in Asia, to spur overall natural gas demand.
“Environmental regulations and timely approvals for new gas infrastructure will also play a critical role in renewed growth,” Poduval said. “Low-cost gas supplies will need new capacity to move to market. Increased participation of environmental groups and local stakeholders in the approval process has hindered the review process.”
Additional reason for optimism came in the form of coal plant retirements and lower operating dispatch costs, which have moved natural gas to its position as a primary power generation source, while global economic growth and opportunities in the liquefied natural gas (LNG) trade also feed this positive outlook.
“Factors stoking optimism for segments of the natural gas industry are plentiful,” the report said. “In North America, local distribution companies are awash in low-cost supplies that are helping to expand natural gas’ use as a source for power generation.”
Still, even as gas supplants legacy coal units, B&V said the attitude expressed among those in midstream and upstream segments have flattened “and in some cases, reflect outright pessimism.” This, suggested B&V, has been primarily brought on by thinning revenue streams for capital investors, which has left many producers with massive supplies but increasingly few places to ship them profitably.
Increasingly, coordination between oil producers, natural gas producers, pipeline operators, local distributors and other industry providers has become integral. Consolidations have also transformed the market, making this interconnectivity more complex, B&V observed. Mergers and acquisitions (M&A) and expansion into downstream markets, such as natural gas conversion products, have also emerged as methods for midstream organizations to remain competitive.
The importance of economic growth has increased in part due to the current gas supply overhang in North America,” said Denny Yeung, a principal consultant at B&V. “With continued shale gas supply growth and producers increasingly finding cost efficiencies, the natural gas industry is prepared and eager to supply the global economy with a low-cost, clean and reliable fuel source.”
In Yeung’s view, economic growth supports not only traditional use of natural gas, but also has spurred more modern uses for natural gas in the transportation sector, namely fleet vehicles and marine vessels. Natural gas exports by way pipelines to Mexico or LNG terminals will also rely on global economic growth for greater economies of scale.
While B&V pointed to the 2016 survey as reflecting “a remarkably high-spirited industry in the face of a downturn in investment and segment restructurings,” it suggested this optimism “may be masking some substantial warning signs.” This remains particularly true for midstream and upstream players as “tight controls on capital investments, tied to the low margins inherent in today’s pricing environment, have constrained new projects.”
Using a rating system in which “5” signified an issue was “very important” to natural gas industry respondents in the United States and “1” meant it was considered “very unimportant,” safety (4.62) was rated as the top concern, the same as last year.
As aging infrastructure concerns continued and with recent high-profile gas incidents gaining media attention, safety has become even more important as demand for gas-powered energy grows and new regulations arise, the report found. In fact, 70% of midstream and upstream participants identified safety, including physical and cybersecurity, as their top long-term industry issue.
“Over the past five years, safety has consistently been one of the most important issues in the industry,” Poduval said. “The natural gas industry has worked tirelessly to engage stakeholders across the value chain on its safety record and its focus on safety and keeping natural gas a safe and reliable fuel source.”
Rated next in order of importance were aging infrastructure and economic/demand growth both at 4.27, environmental regulations (4.26) and gas-supply reliability (4.24). At 4.05, aging workforce has grown substantially in recent years.
“The gas industry has identified a need to develop a younger workforce to help replace those approaching retirement across all functions and levels,” Yeung said.
Regulatory Front
The Environmental Protection Agency (EPA), through rules designed to curb methane emissions in accordance with the Clean Air Act and Clean Power Plan, has altered the playing field for shale gas providers, as well changing regulatory and rate-making activities downstream.
These changes will undoubtedly have an effect on natural gas distribution utilities, which will need to adjust operations and maintenance plays in the near- and long-term in order to comply. Additionally, international policies on climate change are adding significant pressure and influence to fuel markets.
“Environmental regulations have been a growing issue over the last years. As natural gas and renewables play a more prominent role in power generation, environmental regulations on greenhouse gases will impact the fuel of choice across North America,” Yeung said. “New regulations on gas storage or fugitive methane emissions will impact the economics of gas production and continued demand for natural gas.”
The conflicting sentiments this creates for the natural gas industry are reflected in the survey responses. While the boom in gas consumption in the power and industrial sectors is being at least partially driven by climate change and regulatory concerns, these same concerns are drawing attention to greenhouse gas emissions across the entire spectrum of natural gas systems.
When asked what type of overall that long-term economic impact global climate change and environmental programs have on various aspects of the natural gas industry, respondents were primarily negative. Midstream was expected to be most damaged economically with 69% of respondents anticipating either “negative” or “extreme negative” impacts for the sector vs. 27% “positive” or “extremely positive” impact.
Exploration and production (53% negative vs. 35% positive) and pipeline transportation (58% negative vs. 35% positive) were also seen as taking a financial hit. On the more positive side were power and industrial consumption (35% negative vs. 48% positive), and LNG production and export (34% negative vs. 38% positive).
Noting 88.8% of survey respondents believe that it is likely the EPA will regulate methane emissions from existing sources in the future, it would appear the apprehension is related to the economic effects of these perceived impending environmental regulations and programs to their organization.
“Although industry stakeholders agree that greater regulations, especially in the environmental area are impending, the degree of these regulations continues to present an uncertainty,” said Andy Byers, associate vice president and director of Environmental Services in the B&V power business.
“Consequently, companies are apprehensive about being adequately prepared for the changes ahead. We also see this trend aligning with regulatory compliance and cost containment, with these issues being named top industry challenges,” he said.
To that point, with cast-iron pipes still existing and in need of replacement over the next decade in order to maintain safety, LDCs are seeking regulatory approval to secure cost recovery for these replacement programs.
Among additional key findings:
- While a few players are maximizing production to compensate for the reduced unit price of gas, for the most part, global producers are doing little or nothing to expand capacity. Instead, organizations seem focused on mechanical efficiency and reliability, and organizational and product diversification.
- Economic growth in emerging markets is critical to driving global demand for natural gas. With consistently lower natural gas and oil prices, the industry is looking for new and innovative ways to reliably meet this rising demand.
- The significant shakeup affecting higher cost producers has driven many smaller players out of the market, and new investors are negotiating more favorable production and service contracts. “Because gas projects have long lead times, it will be important for organizational planning to consider investment options now and get the competitive advantage that will likely evaporate when demand rises in a corrected market,” the report said.
B&V conducted the online survey July 15-Aug. 5; it reflected the input of 386 oil and gas producers, utilities and other oil and gas industry providers.
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