Formerly GAS PROCESSORS REPORT
VOLUME 29 / ISSUE 54 / September 16, 2011
Breitling’s Faulkner: Midstream, E&P Need To Work Together
The advent of shale plays in North America has brought natural gas and oil exploration to parts of the continent where both the E&P and midstream industries have never been before. This has required a lot of new infrastructure build-out and caused bottlenecks in various regions.
“Capital needs to be spent because a lot of areas still have very little pipeline infrastructure. The midstream partners and operators need to be in better communication with E&P firms to understand these needs,” Chris Faulker, chief executive of Breitling Oil and Gas, told Midstream Monitor. Breitling is involved in E&P activities in Texas, Oklahoma and Louisiana.
Faulkner noted that there is a major bottleneck at the Cushing hub and that producers have to send oil out of the Bakken through rail car because the pipeline capacity there doesn’t meet demand.
“The problems and challenges the midstream has is there are a lot of emerging basins that are being developed at a very rapid pace and midstream capital has been tight coming out of the 2008 financial downturn,” he said.
Midstream operators have been forced to choose the projects they will pursue with more caution, as evidenced by Enterprise Products Partners’ decision to pull out of its proposed joint venture with Energy Transfer Partners to build a 584- mile crude pipeline from Cushing to Houston. Enterprise stated that while there was significant interest in the project, the terms and capacity commitments couldn’t support the project.
“Those kinds of things are frustrating for E&P operators because as we bring wells on, the production can’t move anywhere. We have wells that are waiting to be completed because there is no pipeline infrastructure at all in the area or we’re waiting for it to be built out. As we continue to bring on more and more production from shale plays, the current pipelines are not going to do the job,” Faulkner said.
This is a problem that both midstream and E&P are responsible for, according to Faulkner, because of the compartmentalization of the industry. Producers don’t really communicate with the midstream until they are brining wells on, and then the midstream must play catch-up to either build new infrastructure or upgrade current infrastructure. In addition, frequently the new capacity is only capable of meeting producers’ demands for a short time until production exceeds it and requires new capacity in a play.
Moving from a compartmentalized approach to a more homogenous environment where both sides are involved in developing a play through both production and infrastructure build-out would be ideal, he said. “We can do a better job of bringing midstream into the fold at a much quicker rate.”
“We, the producers, look at the infrastructure in plays like the Bakken, where it is not ready for prime time, but we still choose to go there and drill. I see midstream as a partner in the whole operation,” he added.
While midstream development is late to the party in many of the newer plays, where infrastructure lags years behind production, there are regions like the Bone Spring where infrastructure is already in place. This allows the hydrocarbons from this play to be moved faster and easier to market.
But plays such as this will also face the same issues in the plays without infrastructure: eventually production will surpass capacity and midstream will be playing catch-up in these regions, too.
“My fear is this will be like what we see in every city where there is always some major road construction taking place for a few years, and as soon as it’s done the roads are overloaded again so they have to start over and expand it again,” he said.
One way in which producers have sought to alleviate this problem is by creating their own midstream divisions, which is something that Faulkner sees happening more often.
“We’re looking at doing that, and I think the larger E&Ps and independents will look at bringing on a midstream division and rolling them into the fold.”
Such moves would be similar to producers acquiring or starting their own hydraulic fracturing divisions because they were unable to get fracing equipment to the wells in a timely manner.
The positives aside, Faulkner said that one negative to producers creating their own midstream divisions is that unlike fracing, the midstream is a different animal from E&P and requires significant capital input.
Overcoming Obstacles Through Education
These capital requirements are increasing because of the political battles taking place over the building of new infrastructure, such as pipelines.
“Environmentalists are attacking hydraulic fracturing, which is used in 95% of all wells that we drill today and has been around for over 65 years, but the general public has only recently been made aware of the practice. These groups have also started targeting the development of new pipelines and their expansions by attacking the maintenance and claiming they are dangerous to the environment because of leaks, contaminations and other hazards,” he said.
While it is easy to blame the environmentalists, Faulkner added that the industry can do much more in these political battles through better and more public education efforts. He said that the industry needs to not be as secretive when it comes to fracing.
“People don’t trust us because they haven’t heard a lot from our industry other than ‘it’s confidential.’ That scares people. If we disclose this information and explain what we’re doing and how it can’t contaminate the drinking water, then the public will be more comfortable with fracing,” he said.
Producers also need to use more environmentally friendly ingredients in their fracing fluids and inform the public how it disposes of the water used in fracing jobs. Another way to help ease the public’s minds would be to take water samples of the wells before drilling is done and then afterward to show that no harm was done to the drinking water supplies.
He noted that victories in different state legislatures in achieving bans against hydraulic fracturing could have a domino effect throughout the country and lead to more bans. Obviously, such actions would have a serious effect on the development of unconventional plays throughout North America.
Recently, France has been moving a bill that would outlaw hydraulic fracturing in the country and remove fracing permits that have already been approved. Faulkner said that is a great example of regulators stunting production growth. “The Paris basin has a lot of shale gas in it, but no one is exploring or producing anything there that isn’t already drilled,” he said.
Further education is needed to inform the public about how they obtain their electricity and how harmful to the environment it can be. “I cannot get behind the electric car because I think it is foolish to think you’re helping the environment by increasing the capacity of coal-fired plants in the United States. Yet the general public is not aware that this is the case. People think that electricity comes from the plug in the wall and don’t realize it is one of the dirtiest industries in the world. They don’t realize that when they plug their electric car in that they’re eating up more power and firing up more coal plants to generate this power,” Faulkner said.
While many in the public are not aware of how much electricity is generated through coal-fired plants, they also think of natural gas production as being a larger problem than coal production because it is closer to home — literally.
“Mining for coal isn’t happening in most people’s backyards, but drilling for natural gas is all over the country. Natural gas drilling is coming awful close to home, which is why people are getting behind this campaign of negativity toward natural gas,” he said.
Such campaigns hurt the country — not just environmentally by increasing the use of coal-fired plants over cleaner-burning gas-fired plants — but economically, according to Faulkner.
“We have a serious opportunity to supply energy to other parts of the world by converting LNG import terminals into export terminals. The oil and gas industry can be a major generator of revenue for this country through royalties and the sale of LNG,” he said.
– Frank Nieto