The advent of unconventional drilling techniques has brought about a renaissance of epic proportions in the American oil and gas industry. These advancements have resulted in a drastic upswing in domestic production. Based on numbers released by the U.S. Energy Information Administration (EIA) in its recent Annual Energy Outlook 2014, the United States is on pace to surpass Saudi Arabia to be the world’s top oil producing nation. America has already claimed the top spot in terms of natural gas production, bypassing Russia in late 2013. In order to maintain this growth trajectory, we must continue to develop our midstream infrastructure. Without this vital link, the unprecedented production numbers mean little. The growing demand from foreign markets will be satisfied from other sources, and new consumption applications will never fully develop.
First, let us address the fact that the Appalachian Basin (like many others across the U.S.) is lacking vital takeaway capacity from the unconventional resources being tapped. While there has been massive investment of capital to remedy this problem, the midstream industry is still playing catch-up. Nowhere is this more apparent than in Pennsylvania where rig counts have dropped significantly, while Ohio and West Virginia have simultaneously capitalized in their “wet gas” windows. Despite the exodus of rigs from Pennsylvania, the infrastructure build-out continues in much of the Commonwealth in order to service the backlog of shut-in wells, and in anticipation of the eventual reversal in rig trends. This anticipatory approach bodes well for the future, but effects will be felt in the near-term as construction resources are spread over a larger area. The most challenging piece of the whole midstream puzzle is matching takeaway to upstream capacity with the understanding that the upstream capacity often depends on a volatile mix of market forces.
By no means is this issue confined to Appalachia. Even in the legacy fields of the Permian Basin in west Texas, the infrastructure problem is pervasive. On an international level, anemic infrastructure has played a large role in suppressing more overseas investment by global E&Ps in areas where promising unconventional reservoirs exist. Build-out will be critical for all basins to realize their full potential, and while there is progress, the collective voice of industry is clamoring for more…and yesterday.
The net effect for operators in the Marcellus and Utica has been stifled growth. Growth is a relative term in the current market. These companies are growing, but they could be expanding significantly faster if infrastructure needs were met. It is important to note that a network of pipeline did exist before the shale revolution, however, it was completely inadequate to handle the volume of hydrocarbons being produced today. Expansion of this network, as well as new growth infrastructure, needs to be taking place on every rural road from southeastern Ohio to extreme northeastern Pennsylvania.
The term infrastructure goes beyond transmission lines. The increase in gas production equates to an increase in NGLs, which are being specifically targeted based on market commodity prices. This translates into a need for more separation or stripping facilities and fractionation capacity. Wells Fargo Securities recently forecasted that gas liquids production in just the Marcellus and Utica shale areas could reach nearly 1 billion barrels per day by 2018, which represents approximately five times 2012 output. The build-out of processing plants must continue at a feverish pace to accommodate this expected increase in supply, or risk further limiting operators.
While we have emphasized what is not yet in place focusing heavily on projections and production curves, there has been significant investment and progress on many fronts. To be fair, the geographic focus has been a moving target for the midstream community, and it has responded with a certain level of agility considering intrabasin company movement. The anticipation has been and will continue to be the difficult part of this equation. Without defined geographical boundaries in these plays, the exploration part of the larger process will inherently mean midstream is catching up. Now that boundary lines seem to be more certain here in Appalachia than even a few years ago, we just might see midstream gaining some ground in 2014.
Christopher Gemondo can be reached at firstname.lastname@example.org