Marcellus/Utica Region Cracker Plants

Posted on by

Cracker Plant

Consol Energy’s CEO, Nick Deluliis, thinks that there will be two cracker plants built in this area, neither of which is located in West Virginia.

The advantages that a cracker plant in the area would have include a ridiculous amount of available ethane and proximity to 50 percent of the demand for ethylene and plastics (the products of a cracker plant).  By proximity, he means within 500 miles.  And apparently 80 percent of the demand exists within 1000 miles.

Yet we can’t seem to get a cracker plant built in this state.  I can understand that the Pennsylvania location is a little better than the West Virginia location in some ways, but the Ohio location isn’t any better than the West Virginia location.

If Odebrecht isn’t going to be able to put a cracker plant in, we need to find some other company — and I’m sure the companies that have the ability to build and operate one of these plants are few in number — that can build it.

The State of Oil and Gas – April 2016

Posted on by

OPEC met over the weekend to discuss freezing oil production at January levels.  Predictably, the talks failed.  Iran was never going to agree to freeze production. For them, every barrel of increased production is money they didn’t have when sanctions were in place, and they need the money.  When Saudi Arabia announced that Iran’s participation was necessary, utter failure was clear.  That was Saudi Arabia’s intent all along.  They don’t want high prices yet.  They want to drive more high-price producers out of the market.

With that said, here are (some of) the articles we’ve read over the last month that give a good overview of what’s going on in the world and in the Marcellus/Utica region.  Enjoy!

Our opinion is that oil prices are unlikely to get much above $50/bbl any time soon unless American producers have let too many skilled workers go and won’t be able to ramp up production quickly when prices hit $50/bbl.  This Forbes article says that Saudi Arabia won’t let oil prices get much above $40/bbl because they want to keep American producers from having that option.

American natural gas production reached an all-time high in February.  That’s odd, because everyone has been saying that production has been declining for months.  Apparently the northeast has not been declining, but has been increasing.  Other areas are either flat or down a bit.  Additionally, the weather was warmer than usual meaning gas wells didn’t freeze over like they usually do.  That means there was greater than expected production.  All together it added up to record production.  One of these days we’re going to see gas production start to drop a lot, but today is not that day.

This article at the Washington Times says that oil will recover to $75/bbl by 2020.  We find that hard to believe.  By the time oil hits $50/bbl American frackers are going to be warming up the equipment and getting the band back together.  The only reason oil will hit $75/bbl will be if the frackers simply can’t get the band back together, having to retrain everybody.

Harvard Business Review makes the case for oil prices remaining near the $50/bbl threshold for the foreseeable future.  We find it interesting the most everybody is saying that $50/bbl is the likely soft cap on oil prices.  When everyone agrees about something it’s neither because the data is totally conclusive, or there’s some group-think occurring.  As data regarding oil and gas prices is never conclusive, we’re going with group-think.

The natural gas liquefaction plant in Cove Point, Maryland is on schedule to open in late 2017.

Here’s a guy saying that the $40/bbl rally is based almost entirely on financial influences, the Fed weakening the dollar being the culprit.  He’s saying that the market is imbalanced and there isn’t anything changing that, so there’s no reason for oil to bump up to $40/bbl.  Hey may be right, but $40/bbl for oil seems to be a pretty reasonable price, and maybe markets will just stay there.  And maybe pigs will fly.

We think pretty much everybody completely expected this, but now Saudi Arabia is saying that they won’t freeze their oil output unless Iran agrees to do so as well.  Iran is not going to.  It’s just not.  Predictably, oil prices have dropped.  Natural gas prices have barely moved, though, so we’ve got that going for us.  Also, it looks like April is going to be cold, not just unseasonably cool, so maybe we’ll chew up some of our stored gas a little later in the year than usual.

With the beginning of injection season, this article at the Wall Street Journal (behind a paywall) shows just where we are with gas storage.  It says we may be out of gas storage by August.  That will have, shall we say, interesting ramifications for the industry.  It’s a good thing the Cheniere LNG plant has come online and begun exporting recently.

This article at Seeking Alpha says the we probably hit the lowest point for oil prices back in February.  Zoltan Ban, the author, says the drilled but uncompleted (DUC) wells are not enough to stop any increase in price by a corresponding increase in production, but will “temper” it.  The U.S. is going to have about 2 million barrels per day of decreased production this year.  When you consider that total worldwide use is about 95 million barrels per day, and the Saudis only have at most 4 million barrels per day of surplus production they could bring online, it puts the numbers in perspective.  Next year could be a crazy year for oil prices.

Schlumberger (pronounced sh-LUM-ber-jay) is the largest provider of services to the oil and gas industry.  You’ll see their trucks lumbering around anywhere there is an oil and gas play.  They’re big.  Their CEO gave a presentation in which he said that the efficiency gains that all the oil and gas producers have used to cut costs of drilling and completing wells are not permanent.  In other words, Schlumberger is going to start raising their prices the second the price of oil goes up and drilling activity picks up.  What goes around comes around.  Schlumberger has been playing ball with the producers while prices are down, but the producers are going to have to play ball with service providers when prices go up.  The result will be a slowing of new development when oil prices start to rise, so oil prices will have to rise farther before producers start to drill.  The farther oil prices rise without new development, the more likely it is that the glut of oil will turn into a dearth of oil and really drive prices up.  Ouch.  Not good.

This article at Seeking Alpha is predicting natural gas at $2.90 per MCF by the end of this year, and at an average of $3.20 per MCF in 2017.  The article suggests that we’ve reached the bottom for natural gas because production is dropping off and we’re going to have a hot summer, and we’re going to have added exporting of LNG.  We’ll be a little surprised if prices hit $2.90 per MCF, and a little surprised if production drops off as much as the article suggests, but we do expect gas to start to go up toward the end of this year or the beginning of 2017.  Note: the comment section is just as interesting as the article.

The EIA’s monthly report shows that the Marcellus and Utica plays are slowing down, with production nearly flat.  The prediction for May is that production will be flat.  This is probably the beginning of the end of the gas surplus.

Saudi Arabia, Kuwait, and UAE are all making plans to increase production.  The article posits that Saudi Arabia is really only doing so to keep their market share, and the projected numbers bear that out.  Kuwait and UAE are a little more than that, though.

Keystone Pipeline Leaks, Surface Owners Need to Think Ahead

Posted on by

Keystone-Pipeline

Here in West Virginia and the greater Marcellus shale and Utica shale area we really need pipelines.  The big issue that is keeping us from producing a lot more gas and from receiving a price closer to the Henry Hub price for that gas is that the existing pipeline infrastructure is full.  Packed to the brim.  Overflowing, if that were possible.  We’re big fans of pipeline projects because we need them.

However, we also believe in going into a situation with our eyes wide open.  For pipelines that means you have to be aware that sometimes they fail.  We’ve documented a few explosions and leaks here in West Virginia in the past.

The big news about a pipeline failure comes to us today from South Dakota, where the Keystone pipeline is leaking.  Apparently the company originally told regulators that the pipeline had spilled about 187 gallons of oil.

The leak was discovered last Saturday.  Now, when we say the leak was discovered, we don’t mean that an actual hole was found spewing oil into the air or onto the ground or, heaven forbid, into a body of water.  No, the company merely observed some numbers which indicated that there was a leak.  They either detected a drop in pressure or calculated a lack of delivered product or something.

Six days later they still haven’t pinpointed the source of the leak.  Consequently, the company thinks they have leaked about 16,800 gallons of oil.  Somewhere.

To be fair, they’ve narrowed the location of the leak down and shut off that portion of the pipeline.  They are even digging in the area to find the oil that was spilled and to find the leak and patch it.  It won’t take long, but it’s already taken longer than it should.

This story points out the problem with having a pipeline close to your house.  At some point a natural gas or oil pipeline is going to leak somewhere.  You have to be aware of that eventuality so that you can plan and prepare for it.  You probably can’t stop the pipeline from being located near you, but you can at least do things to mitigate the damage.

You can start off by getting more money from the company.  Take some of that money and buy emergency supplies.

Prepare an emergency plan for what you are going to do in various pipeline-related emergencies.  If the pipeline springs a leak what are you going to do and where are you going to go?  What if the pipeline explodes?  Will you need to do different things in the winter and summer?  What about in the middle of the night or during school hours?  Make sure to think this through thoroughly.

The 42-inch and 36-inch pipelines being built in West Virginia are good for the economy, but we have to be aware of the associated dangers, too.  A 42-incher is going in a few hundred yards from my house, and we’ll be thinking this stuff through ourselves.  Make sure you do, too.

A Virtual Pipeline to a Scottish Cracker Plant

Posted on by

grangemouth-banner

Ineos is a company that, hitherto, has been mostly in the news for it’s plans to build a “virtual pipeline” across the Atlantic Ocean using eight Dragon-class ships to haul ethane from the Marcus Hook deep water terminal to its two petrochemical sites in Norway and Scotland.  That gas originates from the Marcellus shale and makes its way to the Marcus Hook terminal by way of the Mariner East pipeline.  The first shipment of that gas arrived in Norway around the 23rd of March, not quite two weeks ago.

The latest news about Ineos is that it plans to re-open a cracker plant that it had previously mothballed because of a lack of gas.  The cracker plant had relied on gas from the North Sea, but that source dwindled and in 2008 Ineos had to close the plant down.  Now that a new, enormous source of ethane has opened up in the form of the Marcellus shale it has become possible, nay, advantageous to re-open the cracker plant.

Prepare yourself now for some opinionated opining on the part of the writer.

Why can’t we get a cracker plant in West Virginia?!  They’re going to ship ethane hundreds of miles through a pipeline to Marcus Hook, ship it across the Atlantic in eight enormous ships to Scotland and Norway, and crack it there.

Now we all know that the costs for a new cracker plant are measured in billions, and it’s obvious that bringing an already existing plant back into operation is a lot less expensive than that.  It seems, however, that at an average cost of $200 million dollars (that’s not even the actual cost of a Dragon-class ship which we suspect is a good bit more), a fleet of eight LNG transport ships comes to at least $1.6 billion, a good chunk of what a new cracker plant would cost.

The benefits to West Virginia in jobs and tax revenues would make up some of the rest of the difference, and consider the increase in the value of the product.  We would go from shipping the raw, relatively inexpensive ethane out of state to turning it into polyethylene resin, a much more expensive product that is the basis for all kinds of petrochemical products.  We would sell a more finished product at a higher price.

Seems like a pretty important thing for West Virginia, but it just doesn’t seem to be happening.

As an aside, this article tells the story of how the whole project came into being.  It’s a great read.  It also suggests that the cost for the first two Dragon ships was about a billion dollars.  That would have included quite a bit of R&D, so we can’t say that each Dragon ship costs $500 million dollars, but it does suggest that $200 million is probably on the low side.

The Future of American Liquefied Natural Gas (LNG)

Posted on by

Daniel Gross, writing in the Dallas News, thinks that liquefied natural gas is going to be the next big international trade commodity for the United States.  He points out that natural gas sells for $8.25 per MCF in Japan while it sells for less than $2.00 per MCF here in the U.S.  With the first shipment of liquefied natural gas leaving the Cheniere facility in February and a shipment of ethane leaving the Marcus Hook facility in March, exports have begun.  Ineos, the company behind the Marcus Hook shipment, wants to have eight shipments per month within four years.  The Cheniere facility is supposed to eventually have four processing “trains” and only has one right now.  There is also a project, not mentioned in the article, in Canada called Bear Head LNG which is intended to process Marcellus shale gas and sell it to countries that don’t have free trade agreements with the United States.  There are quite a few other projects in the works, too.  Mr. Gross may be right.  LNG exports will at very least make a big splash in the natural gas market.

Mountaineer Gas to Expand Service in Eastern Panhandle

Posted on by

Just about anyone in West Virginia who uses natural gas to heat their homes or cook their food buys from Mountaineer Gas.  Mountaineer Gas also provides gas to industrial customers.  They are expanding their services in the eastern panhandle, adding 46 miles of low pressure distribution pipelines in Morgan, Berkeley, and Jefferson counties.  The pipelines will be between 6 and 12 inches, and run at about half the pressure of a typical transmission line, or several hundred PSI.  The project is expected to be complete by the end of 2017, but still needs approval from the Public Service Commission before work can begin.

The new pipelines are intended to provide gas to industrial and commercial customers.  Lack of gas has been a factor in the decisions of some companies to not locate in the eastern panhandle.  The new Proctor and Gamble plant will need natural gas, and this project is probably part of that deal.  Having natural gas available will make it possible for other companies to locate there in the future.  This is something we weren’t aware of that needed to happen in order to improve West Virginia’s economy.

Any eastern panhandle landowners who will be affected by the Mountaineer Gas pipeline should remember that they can negotiate with the company for better terms, including making the right of way or easement temporary, larger payments, and increased control of the property.  If you sign the first offer they put in front of you, you are doing yourself a disservice, as well as anybody who might inherit or buy the property from you.

DUCs Have Been Coming Online Already

Posted on by

This is a fascinating article on the Reuters website.  It says that some oil companies have already been completing and producing oil from their Drilled but UnCompleted (DUC) wells.  The majority of the work has been in Texas, near the oil refineries, which allows the producer to realize a price close to benchmark prices.  Some of the production has been farther away though, as some companies have their oil production hedged at high enough prices to make production profitable.

This is interesting because it means that some of the oversupply that people have been factoring into their calculations has already been used up.  We may see a bump up in oil prices based off this information.

The question becomes, are some gas producers doing the same thing?  Antero Resources here in the Appalachian Basin has all of their gas production hedged at prices high enough to make a profit.  They also have some DUCs.  Are they completing and producing their DUCs?  Are other companies?  If they are, is the price of gas going to go up sooner than expected?  It’s hard to tell, but we sure do hope so.

West Virginia Needs This Kind of Thing

Posted on by

Primus Green Energy has announced that they are building a gas to liquids plant somewhere in the Marcellus Shale region.  The actual location has not been announced.  Since the plant is supposed to be up and running in 2017 it’s safe to assume that the location has already been decided.  If it hasn’t our governor, legislators, and county officials should be contacting Primus to see what they can do to get it located inside this State. Shoot, gas producers should be knocking their door down.  The plant will be able to use pretty much any type of gas that comes out of the ground and we have a real oversupply of wet gasses to the extent that wet gasses are costing producers money.

That said, Primus Green Energy hasn’t put together a commercial scale plant yet. They currently have one pre-commercial demonstration plant located in New Jersey.  Scaling up to commercial sizes may pose some difficulties.  However, the technology seems to be viable, and the company doesn’t seem to be a fly-by-night operation, so it seems that taking a bit of a risk would be worth it.

Perhaps the most interesting aspect of their technology is that it appears that it can be done on small scales.  There are currently only five gas to liquids plants operating globally, with four proposed, according to the EIA.  Most of them are pretty large.  The one pictured in the link above is certainly not large.  Perhaps this is the kind of plant that could be developed on a local basis with smaller capital funding costs.

Ohio’s Clinton Sandstone Produces Oil From Horizontal Fracturing

Posted on by

EnerVest is drilling horizontal wells down to the Clinton formation in Ohio.  The Clinton produces oil, but not in huge quantities.  It’s enough to make a profit though, even in today’s bad oil market.  The wells cost just under $2 million, and return between $7 million and $10 million.  That’s a pretty good ROI.

Cunningham Energy is doing something similar with the Big Injun and the Weir Sand formations here in West Virginia.  They’re not drilling a lot right now, and the market isn’t good for oil right now, but if they’re able to keep the lights on until oil prices start to come back up they should be in a really good position.

Speaking of oil prices, they’re back over $41/bbl today.  We don’t see those prices being sustainable over the long term but if the Saudis are able to get Iran to agree to a production freeze at any level, maybe they will be.  Maybe.