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Page added on May 28, 2012

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Massive investment needed for oil, gas facilities


Billions of dollars will be needed to build additional pipelines, terminals, and storage facilities to bring new US oil and natural gas resources to market, experts said on May 21 during Deloitte LLP’s 2012 Washington Energy Conference.

Outlays of $10-20 billion/year could be required over the next 20 years to build new systems and facilities as well as modify existing ones, suggested Curt Launer, managing director of natural resources in Deutsche Bank’s Corporate Finance Coverage Group.

“We think the biggest risk won’t be interest rates, but access to capital because so much infrastructure will need to be built,” he said during an infrastructure financing discussion. This session also included Daniel B. Moore, managing director of Morgan Stanley’s Global Energy Group, and Alex Urquhart, president and chief executive of GE Energy Financial Services.

“There’s a lot of capital available,” Urquhart said. “The risk is whether the rules will change and make projects less profitable.”

Launer said the weighted average cost of capital is just under 8%, while many projects’ returns are 12% or better. “The delta is where dividend rates come from, and that’s what investors want,” he said.

Moore said gas and electric utilities look more appealing as aging Baby Boomers turn into retirees and make high dividends a bigger investment priority than future share value growth. The same is true of pipeline and other oil and gas midstream master limited partnerships, Launer noted. Possible changes in the tax treatment of MLPs as the federal government struggles with the budget deficit are the biggest risk, he said.

The game-changer

Growing production from tight oil and gas shales has been the biggest US energy outlook change in decades, they and participants in other sessions at the Deloitte conference at National Harbor outside of Washington, DC, agreed.

US shale gas production growth from nothing in 2001 to 24 bcf in 2011 was just the beginning, according to Greg Leveille, unconventional resources technology development manager at ConocoPhillips. “What we’ve seen so far is small relative to the potential,” he said. “When we look around the world, we see similar growth that could occur.”

Peter J. Robertson, a retired Chevron Corp. executive and now an independent senior oil and gas advisor at Deloitte, who participated in the same session, said, “It’s a remarkable turn of events, not only because of industrial growth but also climate change, where we can rely less on coal and more on cleaner-burning gas for our manufacturing and power generation needs.”

The US gas abundance not only has brought chemical and other manufacturing back to the US because fuel and feedstock prices are so low, but also created the potential for the US to export LNG and improve its foreign trade balance, other conference speakers noted. “I think it’s likely there will be US LNG exports,” said BASF Chief Executive Hans-Ulrich Engel. “Building liquefaction facilities will be expensive, but given current prices, it could be economic.”

Leveille said, “We’re not exceptional when it comes to rocks. On the other hand, we have a technology and government structure which allows most landowners to profit from the development of resources beneath their property’s surface. That’s different from most other countries, where the government controls all of the subsurface rights.”

Other positives

Launer said he expects most US LNG export projects to start operating in 2015-16, with minimal US price increases. He also expects ethane demand to remain strong because of projects that have already been announced.

“In the LNG business, financing takes place off contracts,” he continued. “We think bidirectional facilities could be used in that way, with exports during the summer and imports in the winter to handle demand peaks. They could be designed that way.”

Access to capital for constructing pipelines, terminals, and storage should be good because the oil and gas will need to reach markets, he said. “We only worry about extremes: oil prices that are so high they destroy demand, and gas prices that are so low they destroy supplies,” Launer said. “We bounced off $2[/Mcf] gas recently, and it didn’t destroy supply.”

Urquhart said US gas prices, while up from their recent low in January, are still lower year-on-year. “Maybe demand will drive us out of this to $4-6/Mcf—a ‘Goldilocks level’ that’s not too high and not too low,” he said. “But the price recovery will be supply, and not demand, driven. People we’ve spoken to also say the dry gas plays will still be needed.”

The GE subsidiary has shied away from equity investments in refining and concentrated more on lending, he continued. “We’ve examined how facilities have survived cycles, and have focused on refineries that are in the top operating quartiles,” Urquhart said.

Oil Gas Journal

3 Comments on "Massive investment needed for oil, gas facilities"

  1. BillT on Mon, 28th May 2012 1:11 pm 

    Ain’t going to happen. The lawyers are in the process of making this the next cause that makes them richer. Lawsuits against fraking is the new cause. Not to mention the lack of qualified people and drilling rigs. They will become available just before the huge gas bubble pops and we go back to the ‘good old days’ of high prices.

  2. SOS on Mon, 28th May 2012 2:50 pm 

    Yes, you are correct sir, its politics and not geology that cause peak oil and expensive energy. We have all the energy we need but politics is causing artifical shortages and extreme pricing.

    In persuit of a political agenda everyone is being punished by limited supplies and high prices. Supporters of peak oil politics are not only the oil companies best friends – they keep prices extremely high – but also are causing world wide suffering due to the high energy prices resultilng from the political attack on fossil energy up and down the entire supply line.

    Shortages of skilled workes in the oil field is not a constraint on production. People are pouring into the oil patches across the country. They will find jobs and become productive. Their work serves us all by helping supply needed energy. Efforts to stop this are a strike against the human race and its well being.

  3. DC on Mon, 28th May 2012 5:59 pm 

    How about some massive investments in walkable, bikeable cities, solar, wind, geothermamal, electric trams instead O+G urinal?

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