Midstream shale gas and NGL projects

The U.S. energy industry has undergone a major transformation over the last 10 years with advances in technology that have led to a substantial increase in shale-based gas and gas liquids production.  During the same period, market demand for natural gas as a preferred and cleaner burning fuel displacing coal for power generation as well as growing utilization of natural gas for commercial and industrial applications.  In addition, there is growing demand for higher value natural gas liquids (NGLs) with ethane and propane as feedstocks for production of petrochemicals and chemical derivatives.

In the next five years, based on current trends, the United States is expected to become the third largest exporter of natural gas in the world with an estimated export capacity of over 8 BCFD, which is nearly 14 percent of global gas trade volume.  As the global and U.S. natural gas markets evolve, midstream infrastructure (gathering, processing, compression, transport) for shale assets serves as a critical link in the entire value chain between upstream production and downstream markets.  Adequate capacity of midstream infrastructure enables market balance while maintaining wholesale and retail price stability for end-customers, thereby supporting increased economic activity.

As the market signals new requirements for midstream asset infrastructure capacity, the main challenge for both project sponsors and lenders is to properly balance development of shale products’ supplies with ever-increasing market demand growth.  Key midstream infrastructure elements that require investment include intrastate gathering, processing with NGL facilities, compression and interstate pipeline transmission.

For newly proposed multimillion dollar midstream shale projects, sponsors must undertake, in a timely manner, development activities starting with assessing feasibility, obtaining permits and clearances at federal, state and local levels, and negotiating and executing transactional contracts and agreements prior to any project financing by lenders.  Project development activities, including preliminary and pre-operating expenses are typically funded by sponsors’ equity.  Based on each project’s Debt-Equity Ratio, the required debt financing is syndicated and provided by a consortium of lenders.

The project independent engineer (IE) plays an important role in assisting Lenders in considering new investments, both before and after financial close.  The IE performs due diligence to address technical, economic, commercial and operational aspects of a midstream infrastructure project in order to effectively determine the “bankability” of the investment.  This due diligence enables lenders to assess technical, commercial, and financial risks.  The IE also can provide advice on potential mitigation strategies to address such risks.

The IE provides a wide range of support and assistance to lenders in assessing midstream infrastructure projects.  This includes, but is not limited to, technical review of: the project feasibility report, permits and clearances, environmental impact assessment report, design specifications for main equipment and pipelines, design standards, materials of construction, rights-of-way (ROW), route selection, water, hydrocarbon and utilities supply systems, property titles and list of easements, outside battery limits (OSBL) shared facilities, and utilities.  Further, a review is performed of the pre-FEED package, list of long lead procurement items, health, safety and environmental (HSE) documentation, hazard and operability (HAZOP) analysis, EPA, DOT, and OSHA compliance.  The IE also reviews plans for operations and maintenance (O&M), facility and pipeline integrity, revamps, repairs, retrofits, and decommissioning.

The IE performs an evaluation of total project costs, capital costs (CAPEX), operating costs (OPEX), and economic and financial model analysis.  In addition, the technical aspects of the engineering-procurement-construction (EPC) contract are reviewed.  The IE scope may also include review of off-takers’ contract structures as well as project sponsors’ business models such as Build-Own-Maintain (BOM) and Build-Operate-Transfer (BOT).  The IE scope of work may also include evaluation of market issues, including a review of supply-demand and system balancing, natural gas tariffs and NGL pricing, relevant regulatory framework and policies, and end-customer demographics with segmentation.

Author:

Pat Sonti, Senior Consultant