Increased Focus on Unconventional Gas Value Chain

Oct 26, 2016

As global energy demand continues to increase from both wholesale and retail consumers, natural gas continues to be the cleanest fossil fuel and feedstock when compared to existing conventional hydrocarbon sources such as crude oil and coal.  Accordingly, there have been considerable efforts from various industry stakeholders to further enhance energy independence as well as energy security resulting from crude oil imports and coal usage.  Thus, natural gas has taken center-stage as a “bridge fuel” for a clean energy economy coupled with energy conservation, energy efficiency, reducing carbon footprint, and integration of renewable energy sources such as solar, wind, and biofuels.  As conventional offshore and onshore natural gas sources start to decline, either from associated or free gas, unconventional gas has emerged as a key supply driver.

Over the last decade, the global unconventional gas industry made significant progress in the development and execution of projects and the operations of various assets and related infrastructure.  Viable producing regions and additional resource potential exists including, but not limited to, various parts of North America, Latin America, Europe, Africa and Asia.  In coming years, it will be important to closely monitor and evaluate the various market scenarios and regulatory factors influencing the outlook for the unconventional gas industry.  In some regions where supply far exceeds demand, this can include the potential for the conversion of existing Liquefied Natural Gas (LNG) import terminals into export LNG terminals for sale of unconventional gas production to overseas customers.

Value Chain

Major unconventional gas resources have entered commercial production as a result of various efforts of investors, lenders, project sponsors and exploration & production (E&P) companies.  A key driver has been the effective utilization of state-of-the-art advanced technology and innovative directional drilling technologies to unlock trapped gas reserves.  Also, there has been greater attention on E&P companies to safely and environmentally use benign methods for proper water usage, treatment and recycling during the hydraulic fracturing process.  In addition, there are other commercially viable technologies being utilized by some companies which can eliminate water usage with the substitution of other safer fluids for extracting unconventional gas.

The unconventional gas value chain consists of a very broad supply chain covering; Production, Processing, Transmission and Distribution.  The above-ground infrastructure covers gas gathering pipeline systems interconnecting various production wellheads coupled with gas processing and gas compression facilities.

At any particular unconventional gas development project site, the primary gas resources annual average throughput production is subject to the number of vertical wells and the correspondingly multiple horizontal wells drilled at each wellhead location.  Overall production output from each vertical well is directly dependent upon each corresponding horizontal well’s production output in terms of Estimated Ultimate Recovery (EUR), initial gas production rates and actual decline rates over the economic life cycle of each particular well.  In order to maintain a sustainable unconventional gas production profile on a continual basis, periodic hydraulic fracturing may be required for steady-state volumetric throughput regeneration while unlocking trapped gas reserves from various geologic formations.

The wellhead gas composition consists of various fractions, mainly methane or "natural gas" as well as smaller percentages of ethane (C2), propane (C3), and traces of other of heavier alkanes such as butane (C4) and pentane (C5).  Typically, separation of methane from the heavier alkanes is achieved through the use of pre-engineered and packaged cryogenic expansion turbine equipment systems.  The heavier components from the "cryo-plant" are stored on-site and subsequently exported as by-product Natural Gas Liquids (NGLs) via truck, rail or pipeline depending on the specific location and accessibility to commercial petrochemical and downstream markets.

The produced gas must be further separated, dehydrated, treated, processed, compressed, and metered prior to being sent-out through an intrastate and interstate pipeline transmission system to either wholesale and/or retail consumers.  Along the value chain of Production, Processing, Transmission and Distribution, significant capital expenditure (CAPEX) and operating expenditure (OPEX) is required covering various on-site preparation, capital equipment, products and services as well as equity and debt financing and working capital requirements.

Market Factors

The multitude of market influencing factors impacting unconventional gas value chain include, but not limited to, technical feasibility; federal and state regulatory policy and framework; permits and clearances; environmental advocacy; demand elasticity (subject to wellhead-to-burner tip price, commodity indexation and consumer credit-worthiness); competing alternate fuels (coal, crude oil, nuclear power, imported LNG, hydroelectric, and alternative / renewable energy); capital formation; structured project financing and; associated technical and commercial risks.

Broadly, the major elements of a typical commercial market assessment cover; supply scenario; demand scenario; influencing factors; alternative competing fuels and feedstock scenarios; existing and planned infrastructure; cost of production and; technical, economic and financial viability.  The required commercial market assessment must be based on both quantitative analysis and sound modeling which is undertaken with various key assumptions and indices as well as graphical representation resulting in determination of combinations and permutations of optimistic, most likely, and worst case scenarios.  The results of a high quality commercial market assessment serve as a basis and critical input into a major unconventional gas project’s technical, economic and financial analysis to satisfactorily demonstrate various sponsors and lenders investment objectives, project viability and likeliness of the project to succeed.

Summary

Natural gas has been deemed as a “bridge fuel” to a clean energy economy.  Over the last decade, based on advanced technology and innovation, the global unconventional gas industry has emerged as a key supply source and driver in meeting both wholesale and retail consumer demand. In addition to market influencing factors, there is increased regulatory policy scrutiny due to environmental impact and sustainability factors resulting from Climate Change. In coming years, investors, sponsors and lenders as well as other stakeholders will need to address various aspects of the technical, economic and financial viability of the unconventional gas value chain.