Fueling the move
Opportunities that drive the midstream sector
The energy midstream sector moves crude hydrocarbon from wells to processors. The processed product is then shipped to consumers in bulk. Energy midstream acts a transporter for other companies. It remains unaffected by fluctuating oil prices. The only exception is when their throughput is affected either due to a change in the quantity or demand in a particular region, or in the location of the demand.
All set to soar
Oil demand to surpass pre-pandemic levels in 2022
The COVID-19 pandemic led to a decrease in oil consumption by 8.6 million barrels per day (MBPD) in 2020. However, the global oil demand is set to rise by 3 MBPD in 2022, demonstrating growth and a gradual return to pre-pandemic levels. The pandemic led to a 30% - 40% reduction in capital expenditure (capex) and R&D investments—from $800 million in 2019 to $265 million in 2021. It has resulted in a decrease in the number of oil exploitation projects. This could lead to further reduction in the demand for hydrocarbon energy and a decrease in renewable energy prices of solar and wind. Additionally, innovations in wind, solar, and energy storage (batteries, electrochemical), will continue to bring down the production costs for renewable energy.
In the long run, the oil and gas industry should adapt to this change and reduce their carbon footprint by a third, to avoid losing market share. They can invest in alternatives such as biofuels, waste recycling, and the like. However, this could result in an increase in energy transition and decarbonization acceleration. The climate change debate is unlikely to go away. Due to competitive prices, high efficiency, and relatively cleaner emissions, many countries are focusing on natural gas as a primary energy source.
Pipelines dominate hydrocarbon transportation, and the supply is expected to exceed the existing transportation capacity. This increasing energy demand will lead to new terminals and pipeline construction, especially in the Asia-Pacific (APAC) region. The International Energy Agency (IEA) suggests that global gas-fired electricity generation is expected to expand by over 15 Terawatt-hour (TWh) between 2021 and the end of 2022, and APAC, North America, and the Middle East will account for majority of the capacity additions.
Development of small and complex offshore fields will increase the demand for transporting hydrocarbon to processing centers. This will provide an opportunity for the midstream sector. The American Petroleum Institute (API) estimates that, by 2035, the U.S. will need up to 27,000 to 45,000 miles of pipelines with 10 to 12 million horsepower of compression, and up to 218,000 to 240,000 miles of gathering lines, 22 to 29 million horsepower of compression. Midstream companies will face challenges such as maximizing use and reducing total cost of ownership (TCO), to generate returns on these enormous capital investments.
The evolving drivers
Reducing carbon footprint in the oil and gas industry
Companies that are uncertain about the transition to renewable energy prefer to sign shorter contracts instead of long-term agreements. This will drive pipeline operators to become more customer-oriented to retain long-term throughput. Financers are cautious about investing in capital funds required for new pipeline projects. Thus, pushing pipeline operators to invest their own funds for growth. Capital crunch will drive midstream companies to shift from capex to operating expense (opex) model and reduce transportation costs to retain pipeline use and generate growth funds. Additionally, environmental degradation concerns will highlight the importance of asset integrity and plug leaks. Realignment and mergers and acquisition are now the key focus areas for midstream organizations.
Strive for long-term throughput guarantee
Pipeline operations are asset intensive. Long term transportation contracts are desirable as they guarantee assured return on immobile pipeline assets, spread across geographies. On expiry of existing contracts or construction of new pipelines, customers prefer short- to medium-term contracts due to price volatility, shifting customer bases, and the changing demand for hydrocarbon. Operators want to reduce this uncertainty by way of adopting a more customer-orientated approach, increasing transportation incentives, and becoming resilient to lesser capital outlay.
Crunch of growth funds
Midstream operators need to generate funds for their growth through operating cash flow. Investors are reluctant to fund companies, and instead, focus on capital efficiency. As companies struggle to fund their own projects, they are exploring opportunities with merger and acquisition proposals. This will help companies optimize throughput and interconnectivity to access larger and newer markets, since mergers provide an opportunity to reduce operating costs.
Focus on environmental sustainability
As per API, more than 99.9% of liquids and natural gas products arrive safely at their destination. Reducing the number of pipelines may not increase the safety record further but can increase the cost of oil and gas for consumers. Pipeline safety and energy security are often debated and discussed. Operational improvements, integrity management, inline inspection, corrosion protection, rehabilitation, and pipeline care are becoming increasingly important in legal spheres.
Improve asset integrity, plug emissions and leaks at the source
Approximately 2.5 million miles of pipelines in operation in the USA, were commissioned more than 50 years ago. Many of them are in desperate need of an upgrade for continued safe and cost-efficient operation. Operators face social resistance for upgrading pipeline projects. Delays in permissions and increased social opposition to new pipelines affect project timing and construction costs. Emissions occur from using natural gas at compressor stations and leakage of methane—the main component of natural gas from small leaks—or maintenance activities.
The various leak sources include:
Generation of electricity, steam, heating, or cooling for facility needs
Mobile combustion sources (cars, trucks, and construction equipment) owned for pipeline system operations
Fugitive emissions from nonregulated sources or pressurized equipment that handles natural gas
The way forward
Rethinking business models
Major disruptions, such as the COVID-19 pandemic, force operators to rethink their business models and take conscious decision to change the direction of the business. While others follow suit, the first mover has always had an added advantage.