In the middle of an unprecedented transformation, the midstream industry has seen incredible growth. Now, liquids-rich shale plays have attracted the attention of producers, midstream operators and refiners alike. Due to increased supply and demand, this is a trend that is likely to last for some time.

In fact, a recent report by Tudor, Pickering, Holt & Co. LLC (TPH) suggests that natural gas liquids (NGL) volumes could increase by 700,000 barrels (bbl.) per day by 2015, roughly 25% higher than current levels.

Considering production declines in the Gulf of Mexico and mature onshore basins, there will still be a construction requirement of nearly 1 million bbl. per day of pipe capacity. This shift in hydrocarbon production presents midstream opportunities throughout the value chain. The most likely sources of NGL growth will come from the Eagle Ford, Granite Wash and Permian Basin plays.

Although emerging horizontal plays within the basin make estimates difficult, TPH surmises that Permian Basin NGL production could increase more than 200,000 bbl. per day by 2015. This staggering amount of growth potential means that midstream service providers are well positioned to participate in that growth from the wellhead to the downstream delivery point. This is particularly exciting because the midstream industry has not had a similarly target-rich environment in its history as a substantial stand-alone sector.

Coupled with this growth potential is a system that is currently ill-equipped to handle new production volumes of NGLs. While many multibillion-dollar investments have been made in the past few years, this does not extend to NGL infrastructure. So, many future projects will be required to bring infrastructure online.

To that end, midstream operators such as Lone Star NGL LLC, Crosstex Energy LP and DCP Midstream LP have hit the ground running in hopes of roping up opportunities in the liquids-rich plays in Texas.

Crosstex’s Eunice NGL fractionation facility in Eunice, Louisiana, will be expanded to accommodate additional NGL production.

Roping opportunities

Tackling these issues head-on, Lone Star was recently formed in May 2011 as a result of the acquisition of Louis Dreyfus Highbridge Energy LLC's (LDH) midstream assets by Energy Transfer Partners LP, and Regency Energy Partners LP. The two companies formed a joint venture, of which 70% is owned by Energy Transfer and 30% is owned by Regency.

Both companies determined that they needed to have stronger NGL capability to offer producers to grow their gathering and processing businesses. Thus, a joint venture was born to provide a total solution for gas gathering, gas processing, liquids and residue gas infrastructure.

"One of the most important assets that we acquired is the Mont Belvieu storage facility," says Greg Bowles, senior vice president of Lone Star NGL. "This storage facility has 43 million bbl. of capacity, and is one of the major liquids trading points for NGLs in Mont Belvieu." Lone Star also uses the facility to store all of the finished NGLs, y-grade NGLs, refined products and ethylene.

"It's a very expansive, important storage facility in the Gulf Coast. The other large asset that we acquired was LDH's West Texas pipeline, a 1,000-mile pipeline that starts in the Permian Basin and ultimately ends up in Mont Belvieu and has a 140,000 bbl. per day capability," he says.

The assets include a refinery-services business, which cryogenically processes refinery gas streams. Lone Star fractionates the resulting liquids into the usual NGL components, the five NGL purity products, plus polymer-grade ethylene and propylene.

Just recently, Lone Star announced a spate of new construction projects, including a new 100,000 bbl. per day fractionator in Mont Belvieu, which is expected to be operational in first-quarter 2013. One driver of this project is Energy Transfer's growth in the gathering and processing businesses in the Eagle Ford shale.

"So this is the platform that Energy Transfer and Regency wanted to build off of, to grow their liquids capabilities, and that's what we are going to do," says Bowles. "I see the need for more fractionation capability at some point. Fractionation is kind of unique in that at Mont Belvieu there are a defined number of people that all have their own unique business models. So it's very difficult to look at the collective picture and see if each individual fractionator is fully utilized or not."

Bowles says the company's focus has been to make sure it is able to take care of the liquids that are generated with the projects that are underway. "The first thing that we are doing to address the need for more NGL facilities is to build a new pipeline from West Texas into Mont Belvieu. That project will have a capacity in excess of 150,000 bbl. per day. We have long-term commitments from various producers and processors that support that project, and it is approved and underway."

The pipe will terminate in Jackson County, Texas, at the Eagle Ford, where Energy Transfer is adding significant gathering and processing capability. Also, Energy Transfer is building a pipeline from Jackson County to Mont Belvieu. Utimately, that line will be carrying substantial liquids, from the Permian area, as well as the Eagle Ford.

And Lone Star plans to continue to build its Texas assets. "We are not finished by a long shot," Bowles affirms.

The economics and the technology of drilling have changed fundamentally for producers. Because of this, and due to the extremely wide crude-to-gas price spread, producers are incentivized to drill for as many liquids as they can get, either crude oil or NGLs. "A significant amount of production is happening in areas where NGLs were perhaps never produced in quantity before. Entirely new infrastructure needs to be built," he says.

The incremental production and productivity has so substantially increased that the existing infrastructure is completely full and needs to be debottlenecked, not with minor projects, but with entirely new infrastructure. Because of these two very substantial issues, the midstream industry has an opportunity that it hasn't seen in the last twenty-five years, he says.

"When you look at the markets for the midstream business, the chemical plants are incentivized to crack as much ethane as they possibly can, because their alternative feedstocks are heavier and are priced off of crude oil. Refineries are finding entirely new sources of supply, be it condensate, or the heavier portions of the NGL stream, in volumes that they've never seen before, so they are incentivized to consume the heavier end of the NGL barrel and condensate."

The macro drivers at both ends of the midstream business are calling for more throughput. "We in the midstream business are tasked with figuring out what is the most efficient way to accomplish this," says Bowles.

The problem is, while producers are incentivized to produce NGLs and chemical plants and refiners are incentivized to consume incremental NGLs, all three industries, including the midstream business, are expanding their capabilities at their own pace, in "a bit of an un-coordinated jumble," he says. The job of the midstream business is to get ahead of that curve, and to provide not only the capability to get products to market, but get the products to the right market and, in the meantime, be able to handle the fluctuations that will naturally occur from customers at both ends as they continue to build up their capability to handle more throughput.

"You have to think about aspects of the midstream business, that historically you could take for granted," Bowles says. "Historically, there was always transportation, storage and export capacity for NGLs. None of this is true now."

Everything is on the table now, according to Bowles. "We're looking at converting gas pipelines, refined products pipelines and chemical pipelines that we and others own, as well as building new infrastructure. Everything needs to be on the table, to create the most efficient solution to the great opportunities and equally tough challenges we face. The infrastructure five years from now is going to be radically different than the infrastructure that we have today. It is the job of the midstream industry to make that happen," he says.

“A significant amount of production is happening in areas where NGLs were perhaps never produced in quantity before. Entirely new infrastructure needs to be built.” — Greg Bowles, senior vice president, Lone Star NGL LLC

Wide-ranging strategies

Crosstex Energy LP recently responded to the need for more NGL infrastructure by expanding its Eunice NGL fractionation facilities while also improving access to these facilities and Louisiana product markets through a new NGL pipeline. The pipeline will be an extension of the 440-mile Cajun-Sibon NGL pipeline.

The 130-mile, 12-inch-diameter NGL pipeline extension project will connect Mont Belvieu supply pipelines to the Eunice and Riverside fractionation facilities and has a planned capacity of 70,000 bbl. per day of raw-make NGLs, expandable to 100,000 bbl. per day.

The intent is to move not only Crosstex's NGLs, but also NGLs produced by other parties through the pipeline into Crosstex's Louisiana fractionators and possibly other third-party fractionators.

"The Cajun-Sibon expansion project will connect our much needed fractionation capacity and markets to supplies in the Mont Belvieu area. We will have access to existing key raw-make supply pipelines as well as new pipelines proposed from the Permian Basin and Midcontinent," says Barry E. Davis, president and chief executive officer of Crosstex.

As for becoming an economic alternative to Mont Belvieu, Davis says that Crosstex will be able to offer pricing to producers that is competitive to Mont Belvieu and market diversification through access to Louisiana refineries and petrochemical plants for purity products.

"For us, it's a great project to expand our existing NGL system. In effect, what we are doing is taking raw-make that would otherwise be targeted to Mont Belvieu, and we will put it into our pipeline and deliver it to Eunice. Once there, we will expand our fractionation capacity from its current 15,000 bbl. per day, to 55,000 bbl. per day," he says.

These expansions will give Crosstex a total fractionation capacity, inter-connected in South Louisiana, of about 97,000 bbl. per day, or about 70,000 bbl. per day of available capacity. "That will match up well with our pipeline capacity of 70,000 bbl. per day," says Davis. Capital for the project is estimated at up to $220 million.

"Also, very important to the project is our long-term sales agreement with Williams Cos. for ethane," Davis explains. Crosstex's sales agreement with Williams Olefins LLC, a subsidiary of Williams, provides a secure market for ethane. "Because ethane is the most critical purity product that has to be marketed off of these projects, it was a vital piece of the puzzle for Crosstex to move forward with the expansion."

With the Williams agreement, Davis feels that there is enough demand to warrant the planned expansion of the Eunice fractionation facility. "The Williams agreement was a critical piece, one that we felt had to be completed before we had a feasible project. We think that we have a very viable market for the expansion," he says.

"Longer term, we think that we are simply providing the last piece of the puzzle for all of the raw-make pipelines that are going to bring these products to Mont Belvieu. We have created a significant alternative to the Mont Belvieu fractionation option, which will continue to be a strategy of ours," he notes.

Historically, the Louisiana NGL markets were supplied primarily by Gulf of Mexico production, which has declined by about 60% during the last ten years. As the production in the Gulf has declined, so have the associated natural gas liquids. "What we are doing is bringing new raw-make liquids to replace what historically has been produced in the Gulf. Our pipeline into the Mont Belvieu area is providing a much-needed source of supply for the Louisiana petrochemical and refinery markets," Davis says.

He warns that supply in the Gulf of Mexico will continue to dwindle. During the past several years, the declines in the gulf have become even more pronounced as a result of the challenges of last year's BP Plc. Macondo spill. "I'd say that while we are optimistic in the long-term, we think that we must be ready to deal with continuing declines in the near-term," says Davis.

Permian power

In addition, Crosstex recently unveiled a partnership with Apache Corp., under which Apache and Crosstex will jointly invest $85 million in a new-build natural gas processing facility in the Permian Basin in West Texas.

The project's initial phase will provide interim and long-term processing solutions, compression and residue gas take-away for Apache's Deadwood development in Glasscock County. Initially, Crosstex and Apache will install a refrigeration plant with a capacity of 20 million cubic feet (MMcf) per day for interim gas processing, compression and take-away—all of which are expected to be operational by fourth-quarter 2011.

A cryogenic gas processing facility with a capacity of 50 MMcf per day is expected to be operational in second-quarter 2012. Crosstex and Apache plan to fund the processing project equally, with each holding a 50% working interest.

According to Davis, the project was prompted by several drivers. "Apache is a leading producer in the Permian Basin with a very active development program, which is driving the need for this facility. Crosstex brings great experience in building infrastructure in rapidly developing unconventional resource plays."

Davis notes that the experience Crosstex has in the Barnett shale, dating back to 2004, and its experience in the Haynesville shale, dating back to 2008, are examples of similar opportunities that the Permian Basin currently represents.

Separate from the join-interest project, Crosstex purchased and is upgrading the Patriot fractionator in nearby Midland County to increase take-away capacity in this region. Crosstex renamed the facility the Mesquite terminal.

"The Mesquite terminal is a very important part of our Permian solution. We need access to take-away capacity now for our Deadwood project NGLs, as well as take-away for other producers that are constrained in the area."

By fourth-quarter 2011, Crosstex will have the Mesquite terminal running and ready to receive NGLs for movement into fractionators in the Mont Belvieu area or the Gulf Coast of Louisiana.

"It's a very key part for a relatively small transaction. We will invest about $12 million in the Mesquite facility and it will be a very quick and beneficial addition for us economically," he says.

“We have created a significant alternative to the Mont Belvieu fractionation option, which will continue to be a strategy of ours.” — Barry E. Davis, chief executive and president, Crosstex Energy LP

By most estimates, Permian NGL production will be constrained through 2012 to 2013 until new pipelines are brought into service. "This constraint will only continue to worsen over the next several months as we see continued Permian drilling and the development of additional NGLs."

As for additional projects, Crosstex is focused on future growth from its Apache venture. According to Davis, "We plan to expand on the relationship with Apache, as well as with other producers in the vicinity of our operations there. This is only the beginning."

Separately, Crosstex also recently closed a deal with Howard Midstream Energy Partners LLC, which commenced operations with the acquisitions of Texas Pipeline LLC and Bottom Line Services LLC for $76 million. Crosstex and Quanta Services Inc. each provided an initial capital contribution of $35 million. Additional funds were provided from the managements of Howard Energy and Bottom Line Services and private investors.

"We are very focused currently on expanding our operations to establish footprints into new basins. The three recently announced projects are in the 'center of the radar' of our strategy," Davis says.

Tracking opportunities

Meanwhile, Denver-based DCP Midstream LLC is also tracking down NGL opportunities in Texas.

The company is creating new NGL transportation with two, 700-mile pipeline projects—the Sandhills project, running from the Permian Basin to Mont Belvieu, Texas, and the Southern Hills project, running from Conway, Kansas, to Mont Belvieu, Texas.

Both pipelines should relieve capacity constraints currently affecting producers. "We prefer open-access pipeline systems to give producers transparency so they can ship on the systems if they wish and have their business governed by tariffs that all producers abide by," says Bill Waldheim, president of the northern business unit of DCP Midstream.

DCP Midstream plans to acquire the Seaway Products Pipeline Co. from ConocoPhillips. The pipeline will be renamed the Southern Hills Pipeline and converted from refined products service to NGL service. Southern Hills should help producers in the Rockies and the Midcontinent access premium Texas Gulf Coast markets.

Also, DCP Midstream is building the Sandhills Pipeline to handle increased production from the Permian Basin and the Eagle Ford shale. "We are far along in the development of that project. We've ordered pipe and have begun to do some of the construction on the eastern end of that system, which is exciting," Waldheim says.

Recently, DCP Midstream announced another major deal for Sandhills. The company entered into agreements with West Texas LPG Pipeline LP that provide long-term NGL gathering services for the Sandhills Pipeline through two new interconnect points with West Texas LPG. According to Waldheim, this was a strategic arrangement to minimize pipeline gathering capital and use excess capacity to feed the pipeline.

According to Waldheim, the company has firm plans to continue growing its downstream NGL transportation business. "The Sandhills project, which is a large, long-haul pipeline from the Permian Basin down through the Eagle Ford, is an example of that. We are the largest producer of NGLs in the Permian, where we produce upwards of 130,000 barrels per day. That figure is growing constantly with the growth of E&P companies drilling in the area."

The company sees numerous opportunities for bolt-on and expansion projects. Waldheim says, "We have on the drawing board plans to expand and build processing facilities, along with the long-haul NGL pipelines previously discussed. The plants and pipelines will serve DCP and our producers."

Waldheim is confident about the role midstream will play in the future of energy security. "The environment for both natural gas and the gas processing industry is positive," he says. "Natural gas is clean, and it's going to be the fuel that bridges us to the future. Additionally, this wide gas-to-crude price spread is an advantage for the domestic chemical business, so they are very competitive against naphtha-based crackers in Europe and the Far East. U.S. crackers are able to export into markets like South America due to this competitiveness. The chemical industry is extremely competitive in exporting product right now, and we don't see that changing at this point."

On that note, Waldheim says, the continued production of the shale plays is going to keep natural gas at a modest price level. "Maybe not at the $4.25 you see today, but we do think gas will settle in and around $5 or $5.50 and we think at that price level, and with crude oil in the $85 to $100 range, the U.S. chemical industry has a great advantage," he says .

“It will be challenging in current NGL markets just keeping pace and executing on your projects to serve your customer’s needs.” — Bill Waldheim, president of the northern business unit, DCP Midstream LP

However, NGL consumption by the chemical industry is just beginning to grow. "As demand rises from both domestic and international sources, I foresee more announcements of debottlenecking and new world-class cracker projects. The chemical industry recently said new crackers would never be built in the U.S. Well, guess what? We now have several announced projects with more to follow. Chemical companies feel comfortable that the domestic gas processing industry is going to have enough feedstock for them that they now are willing to commit capital on their end to expand their facilities," says Waldheim.

All in all, the capital spend from E&P companies to midstream companies to end-use companies in the industry is building capacity throughout the value chain, Waldheim says .

DCP Midstream will continue to look for new opportunities to expand. "I think the general consensus of our strategy over time has always been that we are a company that has been built upon acquisition, greenfield development and bolt-on activities," Waldheim says. "We've always said that those strategies were our strengths."

NGL pipeline infrastructure is increasing and fractionation facilities are being announced and constructed left and right, he says, adding, "While midstream is expanding greatly, every facet of the value chain is under an expansion mode now to accommodate the increased volumes that we anticipate."

Waldheim believes the Texas shales are "some of the most exciting areas to watch" as the industry rushes to handle NGL demand. "We are a player in the Eagle Ford and in the Permian as well as the Midcontinent Woodford shale and Granite Wash. We see a lot of activity ramping up in these areas."

As E&P companies continue gunning for the liquids-rich areas, DCP Midstream is optimistic that it can offer NGL solutions. "The regulatory environment in Texas is good versus Pennsylvania and the oil and gas industry is robust in Texas," Waldheim says. "So it appears to us that there is a lot of capital being committed to these areas from the E&P and midstream companies, and hence, we are committing capital ourselves. Right now, I don't know if acquisitions make the most sense because things are getting pricey. So we are in the midst of developing greenfield projects and bolt-on projects. However, you should never say never. We always look at what is available."

According to Waldheim, the future will be a fast-paced and challenging one for midstream operators looking to grow in the NGL space. "It will be challenging in current NGL markets just keeping pace and executing on your projects to serve your customer's needs. There is a lot of money being spent, but that translates into putting steel in the ground and getting the projects online," he says.