Abstract
The midstream activities are necessary to bring oil and natural gas from producing fields to consumers but are typically low-margin businesses. Oil consumption is almost universal; midstream infrastructure may be taken for granted. But, pipeline examples are provided to demonstrate the necessity of midstream to monetize oil resources. The challenge is more acute for gas. Gas consumption is not as pervasive as oil consumption because it requires expansive networks of pipelines, storage, and customer connections. If there is no heating demand, power generation and industrial use are the only options to burn gas but they are dependent on existing electricity and industrial infrastructure and demand. Gas exports have to be via pipelines or in liquefied form, which can be expensive. As a result of these challenges, gas resources have remained stranded in many cases. Examples of gas export projects and future trends are discussed to underline the need to consider midstream investments when evaluating resource potential.
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Notes
NGLs include ethane, propane, butane, and heavier molecules.
Refineries have flexibility to adjust their production yields according to demand for various products and/or their access to different quality crudes. This market responsiveness might render it possible to include refining as part of the downstream. Alternatively, given that refining transforms crude oil into products such as gasoline, diesel, jet fuel, and others that consumers demand, it might be more reasonable to treat it as a midstream activity. Crude oil is sometimes used directly for power generation, for example, often in resource-rich countries; but, such direct use of crude oil reduces the value that can be extracted from a barrel if it were refined and is increasingly avoided.
Figure 1 is a modified version of Figure 3 in a report prepared by the author for the Energy Information Administration in 2014: Global Hydrocarbon Model Upstream Module Design Considerations (http://www.eia.gov/forecasts/documentation/workshops/pdf/1_Upstream_Component_Design_Model_Report_Gurcan_Gulen_Bureau__Econ_Geology_Nov_2014.pdf).
Brazil’s 2001 electricity sector crisis that laid the foundation for the policy of promoting gas-fired generation and supported the development of the BTB pipeline is discussed in the Center for Energy Economics (CEE) case study: http://www.beg.utexas.edu/energyecon/new-era/case_studies/Brazil_Power_Market_Crisis.pdf.
The World Bank also supported the pipeline from Bolivia to Argentina in the 1970s. Historically, the World Bank has supported large capital-intensive infrastructure projects in energy and other sectors by mitigating political risks, which helped to mobilize private sector financing (http://www.worldbank.org/en/programs/global-Infrastructure-facility).
For details on commercial arrangements and political context of the BTB pipeline, see the CEE case studies: http://www.beg.utexas.edu/energyecon/new-era/case_studies/Bolivia_to_Brazil_Pipeline.pdf and http://www.beg.utexas.edu/energyecon/new-era/case_studies/Gas_Monetization_in_Bolivia.pdf.
For a more detailed discussion of the power sector reforms in Peru implemented to support Camisea development and resulting conflicts, see the CEE case study: http://www.beg.utexas.edu/energyecon/new-era/case_studies/Gas_and_Power_in_Peru.pdf.
See CEE case study on Trinidad LNG Project: http://www.beg.utexas.edu/energyecon/new-era/case_studies/Trinidad_LNG_Project.pdf.
The Gorgon LNG project off the northwest coast of Australia offers a good example. The facility finally came online after major cost overruns and delays but during a low-price environment (http://www.bloomberg.com/news/articles/2016-01-20/chevron-s-costly-lng-project-to-start-in-shadow-of-oil-collapse).
The success or failure of a project refers solely to whether the necessary midstream investment to connect the resource to demand was made or not. In this article, we are not concerned about the commercial viability of the midstream project nor those of the associated upstream or downstream investments.
The CEE case study on the Trans-Caspian Gas Pipeline provides a discussion of the project and reasons for the project’s stalling (http://www.beg.utexas.edu/energyecon/new-era/case_studies/Trans-Caspian_Gas_Pipeline.pdf). More details can be found in Foss et al. [5].
The history of the project is provided in detail at China National Petroleum Corporation (CNPC) web site: http://www.cnpc.com.cn/en/FlowofnaturalgasfromCentralAsia/FlowofnaturalgasfromCentralAsia2.shtml. The importance of this pipeline for both China and Turkmenistan can be gleaned from a recent news article: http://www.naturalgaseurope.com/turkmenistan-supplied-125-bcm-gas-to-china-25610.
See Foss [2] for an insightful discussion of the North American natural gas market.
Project financing and the role of the World Bank is discussed in further detail in the CEE case study: http://www.beg.utexas.edu/energyecon/new-era/case_studies/Chad_Cameroon_Pipeline.pdf.
Foss and Gülen [3] offer as assessment of US LNG exports’ competitiveness under current market conditions.
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Gülen, G. Importance of Midstream in Oil and Gas Resource Development. Curr Sustainable Renewable Energy Rep 3, 23–27 (2016). https://doi.org/10.1007/s40518-016-0049-x
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DOI: https://doi.org/10.1007/s40518-016-0049-x