FocusUS oil, gas industry faces transport, regulatory challenges

16 May 2013 22:48  [Source: ICIS news]

HOUSTON (ICIS)--The shale boom has transformed the energy outlook in the US and boosted its economy, but the oil and gas industry still faces a number of transportation, regulatory and other challenges, an executive said on Thursday.

“This is really a world-class development, and obviously, there’s a lot of positives to it, but it raises a lot of issues to it too,” said Curt Anastasio, CEO of US midstream energy company NuStar.

“The wise use of these new resources – how is this going to be invested and how is it going to be spent – all of that remains to be seen to make sure this isn’t a squandered opportunity,” he said during the NABE Industry Conference held by the National Association of Business Economics.

Transportation Challenges

Most crude oil imports came from the US Gulf Coast to supply refineries in that area as well as in the mid-continent region.

Now, the flow is reversed as the industry began seeing significant production increases in Canada, as well as the US in North Dakota, Colorado and Texas.

Also, much greater volumes of shale oil have overwhelmed transportation and storage infrastructure.

“Now we have all this new production in locations and in volumes where it was not anticipated, so you have greater pipeline infrastructure that’s kind of in the wrong place right now, or it’s in the wrong service where it’s flowing in the wrong way,” Anastasio said. “So a lot has to be transformed and rebuilt to accommodate all this new production.”

However, $10bn-20bn/year of investments is going to be required over the next 20 years to build new systems and facilities and to modify existing systems to accommodate the growth in the US oil and natural gas production, he added.

The short-term solutions are relatively costly as it is more expensive to transport products by rail than it is by pipe, but producers will continue to use those higher-cost transportation options because they have the economics to do so.

“Rail was almost nonexistent in the oil industry,” Anastasio said. “It was costly. It was inefficient. Nobody really needed it. Nobody wanted to deal with the unions and everything. It was just a bad option.”

He added: “But rail has just exploded in this industry. It’s being used everywhere. It’s also kind of the right time at the right place, and pipelines were not in the right position to accommodate all this production. So it’s been great for the rail.”

Eventually, the pipelines will be built, but Anastasio said the industry will continue to use rail because it offers flexibility.

“Rail can offer you multiple destinations from a given point. Pipeline goes from A to B, but you may want C to D or D to E, and you may want that flexibility more so than steel pipe.”

Regulatory Challenges

Federal regulations are not conducive to building crude pipelines.

The Federal Energy Regulatory Commission (FERC) has no authority to authorise an interstate pipeline project, and state and local permitting requirements are all different and conflict with one another, slowing down the process and making it more costly, Anastasio said.

In addition, crude oil pipelines are regulated as common carriers, so they must provide transportation service to any party that reasonably requests service.

Also, pipeline companies need customer commitments to move forward with pipeline projects, and prospective customers are not necessarily likely to support a new pipeline project without firm rights to the pipeline capacity.

“There’s long lead times to these projects – two or three years, in the case of Keystone XL, forever,” Anastasio said. “There are others that are multiple, multiple years, and you’re spending a lot of money during that period of time, and you need shippers to commit to you so you can earn material on that investment.”

He added: “You’re going to get those commitments if the beneficiaries do not know if this project is really going to happen. So it’s kind of a chicken and egg problem.”

Another regulatory challenge is pipelines crossing the US border require federal approval, which is highly political.

Also, federal laws ban exports of US crude, and while there are some exceptions made, they require licences from the US Department of Commerce.

In addition, federal law, such as the Jones Act, requires that any intra-US shipping has to use US flag vessels manned primarily by US crews, which are not widely available and can be quite costly.

Other Challenges

The oil and gas industry also faces a number of other challenges.

Refiners have made massive investments to process the imported heavy-sour oil, and the shale boom has increased production of the mostly light-sweet oil.

Another challenge is the consumption of water used in hydraulic fracturing, or fracking, which involves injecting a large amount of a water-and-sand mixture into deep shale rock formations to free up previously inaccessible natural gas.

“I thought this would really be the biggest issue inhibiting fracking and inhibiting oil and gas shale development,” Anastasio said. “But it’s becoming less and less of an issue as time goes by.”

Shale development water usage represents less than 1% of total water usage in the affected areas.

Also, many drillers are moving toward using recycled or brackish water, and the amount of water being used is declining as well.

“The reality is pipeline transportation is by far the safest and lowest-cost mode of transportation,” Anastasio said.

Extensive regulation ensures the safety in the design, construction, operation and maintenance.

In addition integrity management provides for continual evaluation of pipeline condition, assessment of risks to the pipeline, inspection or testing, data analysis and follow-up repairs.

“Shale development really is a game changer for America,” Anastasio said. “It’s something we really ought to be proud of. You will hear a lot of debates and a lot of negative comments about this, but this happened because of technology developed.”

He added: “Everything I can think of about this technology has improved. As it spreads around the world – maybe China or Russia or other places, Mexico should be next – they're going to be relying on American companies and American technology to get this done.”

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By: Tracy Dang
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