Hi, and welcome to Oil 101, the podcast.
My name is Doug Stetzer and I'm content and community manager for EKT Interactive.
Today we will be discussing the Midstream segment of the oil and gas industry. This content was developed by industry experts with decades of experience and used at Fortune 10 companies, oil and gas super-majors, financial services firms, and many more.
Our Fundamentals of Midstream ebook is available in the free members content library at www.ektinteractive.com.
So, What is Midstream?
As its name implies, the midstream segment of the oil and gas industry encompasses facilities and processes that sit between the upstream and downstream segments. Activities can include processing, storage and transportation of crude oil and natural gas.
In most cases, oil and gas reserves are not located in the same geographic location as refining assets and major consumption regions.
Transportation is a big part of midstream activities and can include using pipelines, trucking fleets, tanker ships, and rail cars.
Characteristics of the Midstream Segment
The midstream segment is separated from upstream and downstream in most integrated oil companies because it is considered a low risk, regulated type of business. It does not fit the risk profile or asset complexity of the other segments of the oil and gas industry.
Success in midstream depends on many external forces including Upstream operation's continuous delivery of reserves and refinery margins that encourage refined product production. Natural gas price levels that impact the attractiveness of NGL's as feedstock also impact midstream.
Healthy downstream, natural gas, and petrochemical markets are important to the midstream segment. After all, those segments contain a midstream operator's customers.
Finally political sentiment for pipeline expansion and not in my backyard hurdles can be challenges to midstream expansion.
While the midstream gathering and processing sector is relatively free of commercial regulation, the movement of oil and gas by interstate pipelines and subsequent state level distribution activities are highly regulated in the US by the Federal Energy Regulatory Commission (FERC).
Further, cross-border pipeline expansions can require approval from the
Executive branch and become part of the national political debate.
We've seen this scenario play out publicly with the segment of the proposed Keystone XL pipeline linking Canadian oil fields with US pipelines and refining capacity
Midstream Participants
Some of the largest North American midstream oil companies include Enterprise Products, Kinder Morgan, Enbridge, TransCanada, Williams Companies, Plains All-American, and Koch Industries.
These participants are categorized by the portfolio of midstream assets they own, such as distribution, storage, processing, fractionation, and marketing.
These assets will be discussed further in subsequent episodes and are covered in some of our upcoming more in depth content. We'll be sure to add links to the transcript as they become available.
Oil and Gas Processing Next Step in Adding Value
So, while producing crude oil and natural gas is the goal of upstream, processing oil and gas liquids into marketable products is the beginning of the midstream segment of the business. These products then continue into the refining or processing portion of the downstream segment.
Field processing is the first phase of oil and gas processing starting in the onshore or offshore production field.
Here, surface facilities are designed and installed that:
- Measure the production rate of the oil, gas, and water that is produced from the reservoir
- Separate the oil, gas, and water from one another
- Remove impurities to prepare the crude or gas for sale or the next process
- Temporarily store the crude or gas until it is ready to be moved to the next process
Fractionation plants, which remove natural gas liquids (NGL) from the produced oil and gas are also a component of the midstream activities. These NGLs are used as blend components in a refinery and used as fuel or feedstock in the manufacture of petrochemicals.
We have more materials as well as some articles on recent developments in the NGL markets that we'll link to in the program notes.
Transportation
After field processing, treated oil and gas is delivered via complex transportation, transmission and distribution infrastructure.
Crude oil and refined liquids start their journey in a spider web of small-diameter field gathering pipelines. Once accumulated, larger volumes are moved along the coast or through rivers in smaller barges and transported internationally in tankers or vessels.
Land transportation methods include pipelines, truck and rail.
Natural gas, which flows at much higher pressure than crude oil, is most often transported in large-diameter, high-pressure-handling pipelines called transmission lines.
A common point of confusion in our industry, whether you're new to it or not, is NGLs vs LNG.
Natural Gas Liquids vs Liquified Natural Gas.
NGL, LNG What's the Difference?
NGL is an acronym for Natural Gas Liquids which are the liquid hydrocarbons normally associated with Natural gas. Most common NGLs are methane, ethane, and heavies like propane and butanes. Depending on the gas pressure, the heavies will condense and constitute the liquid or wet portion of the natural gas.
You will commonly hear differentiation in natural gas fields as to whether they are predominantly wet or dry. NGLs are much more valuable as raw material for further processing than as fuel for simple combustion.
LNG on the other hand is an acronym for Liquefied Natural Gas the gaseous portion of natural gas (mostly the methane and a little ethane) in the liquefied state which occurs at -260 oF. LNG is an efficient way to move, transport and handle large quantities of natural gas instead of trying to store it in the gaseous state at elevated pressures.
While pipelines are the safest and most efficient and way to transport oil and gas, trucks and rail are more flexible in terms of timing and destination. Adding new pipeline infrastructure takes considerable time and investment, and often faces political resistance.
The recent growth in domestic US production has led to an expansion of crude-by-rail shipments since many new fields are not connected to existing pipeline infrastructure. A lack of pipelines exist to directly service domestic refining centers in the Northeast and Gulf Coast as these have traditionally been supplied by oil imported from overseas.
This concept will be discussed more in depth in the Industry Trends module.
Storage
Moving on from transportation, let's discuss storage. The methods of storage for crude oil and natural gas are quite different, so we'll break down each group separately.
Crude Oil
Storage facilities for crude oil and refined liquids is pretty straight forward. Methods include bulk terminals, refinery tanks and holding tanks to get material into pipelines, or ready to be shipped on a vessel.
Cushing, OK is the delivery point for the NYMEX/CME crude oil futures contract. As such, it is an important storage location for traders looking to deliver oil against these contracts.
There is currently storage capacity to hold about 65 million barrels of oil at this location (up from about 26 million in 2005).
The Strategic Petroleum Reserve (SPR) is an emergency storage of oil maintained by the US Department of Energy. Current storage capacity is approximately 727 million barrels, with about 695 million barrels (or 36 days consumption) in inventory.
Can anyone guess what brought about the development of the SPR?
If you guessed the oil embargo of 1973-74 you're right. This supply disruption really exposed just how reliant the US was on imported oil at that time.
Natural Gas
Natural gas is another story. Because of its extremely high pressure, natural gas must be stored in underground reservoirs until it is ready to be transported to market. Most commonly depleted gas reservoirs are used, with gas being injected back into the ground to await it's next move. Salt caverns and aquifers are other storage possibilities.
There is approximately 3.5 trillion cubic feet of working gas in nearly 400 facilities in the US.
Midstream Oil and Gas Summary
The midstream segment of the oil and gas business concentrates on the processing, transportation, and storage of crude oil and natural gas.
Midstream activities are considered a low-risk, highly-regulated segment of the oil and gas industry.
Field processing is the first phase of oil and gas processing starting in the onshore or offshore oil or gas production field. Fractionation plants, which remove natural gas liquids (NGL) from the produced oil and gas are also a component of the midstream activities.
After field processing, treated oil and gas is delivered via a complex transportation, transmission and distribution infrastructure.
Storage facilities for crude oil and refined liquids include bulk terminals, refinery tanks and holding tanks. Because of its extremely high pressure, natural gas must be stored in underground reservoirs until it is ready to be transported to market.
Thanks for listening, and we hope you've learned a few things about the midstream segment of the oil and gas industry.
Be sure to share this as you see fit, and review us on itunes if you have a chance. Your feedback really helps us improve as we move forward.
If you want more information about our Oil 101 content go to www.ektinteractive.com and register to access our free content library.
See you next time.
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