Executive Q&A viewpoint

Richard Cargile, President of Midstream, Energy Transfer Partners LP

Energy Transfer Partners LP (ETP) continues to dominate the US midstream sector via acquisitions, organic growth and asset repurposing and diversification.

In 2010, ETP’s parent company, Energy Transfer Equity LP, acquired the general partner of Regency Energy Partners LP. More recently, the Energy Transfer family of companies grew to include Louis Dreyfus, Southern Union Co. and Sunoco.

In February 2014, ETP announced a long-term agreement with XTO Energy Inc., a subsidiary of ExxonMobil Corp., to provide midstream services for natural gas produced from a number of XTO wells in the Permian basin. As a result, ETP will construct a 130-million-cubic-feet-per-day (MMcfd) cryogenic processing plant in Glasscock County, Texas, with expansion capability to 200 MMcfd. ETP will also build more than 100 miles of high-pressure and low-pressure gathering pipelines connecting to the plant. The new plant and gathering lines are expected to be in service in the third quarter of 2014.

In March 2014, ETP announced an open season to assess interest in a pipeline to move crude oil from North Dakota to various Midwest and Gulf Coast refineries and terminals, including Sunoco Logistics Partners LP’s crude oil terminal in Nederland, Texas.

Elsewhere, ETP will repurpose gas pipelines into liquids service, and begin new work in the export industry. Gas Processing talks with Energy Transfer’s president of midstream, Rick Cargile, about the state of the industry and what is next for the midstream giant.

Fig. 1. Energy Transfer Partners’ North Texas System includes the 480-MMcfd Godley gas processing plant in Godley, Texas.

GP. ETP was very active last year.

Cargile. Yes, we had a lot of success with project executions and our speed to the ball. During the past two years, we’ve gone through a very successful transformational journey. We’ve diversified our geographic portfolio and our asset platform.

In 2012, we were the largest dry gas transmission company in the nation. Now, we are one of the fastest liquids-rich, asset-growth companies in the nation. We also saw significant growth in our gas gathering and NGL processing.

GP. What strategies led to this phenomenal growth?

Cargile. We used acquisitions, organic growth and repurposing strategies. We acquired Louis Dreyfus Highbridge Energy, which had a strong base in NGL transportation and storage assets. Then we acquired Southern Union Co., and then Sunoco Logistics Partners LP, where the focus was on extending our footprint, creating critical mass and [capitalizing on] crude oil logistics.

We used an organic growth strategy in the Eagle Ford shale play to integrate dry gas development into our Texas intrastate system, rich gas into our La Grange rich gas processing system and new processing capacity. We also added NGL transportation and fractionation takeaway capacity with the new Lone Star NGL LLC assets.

We have also been successful in securing fee-based projects for exporting products from our fractionators. In the Eagle Ford play, we are the fastest-growing midstream company, as we’ve added over 1.1 Bcfd of processing capacity. Plus, we have the 220-MMcfd La Grange processing capacity in the area. This transformational journey from dry gas assets to liquids-rich assets was accomplished through both acquisitions and organic growth.

The next stage is repurposing assets. We are repurposing assets like Trunkline, where we are converting a 30-in.-diameter gas line to crude oil service. We are converting a segment of Houston Pipeline from gas transmission to condensate and crude oil service. Also, we converted a segment of Trans­western Pipeline from dry gas to NGL service in New Mexico. We are repurposing our LNG assets from gasification to liquefaction at Lake Charles, Louisiana.

By undertaking these projects, ETP has extended the vertical value chain and expanded its rich gas gathering and processing business, including transporting liquids, fractionating liquids, and even exporting the products. We’re creating critical mass, and we’ve been leveraging our assets and positions.

GP. Was this the strategy ETP followed when it acquired Sunoco?

Cargile. Yes. [Sunoco] had the Nederland facility on the Gulf Coast, which is one of the largest crude oil terminals in the world. By leveraging off that asset, we are able to take products from Mont Belvieu, Texas, that we fractionate, such as propane and butane, and we are transporting that over to Nederland and onto ships for export.

Sunoco also had the Marcus Hook terminal in Philadelphia, where we have been able to repurpose some petrochemical pipelines to ethane transportation in the Marcellus area for loading onto ships and export to Europe. It’s been very fast-paced and a lot of fun.

GP. Has ETP grown its gas processing assets as well?

Cargile. We have. We’ve constructed nine processing trains during the past couple of years for both ETP and Regency, primarily in the Eagle Ford. We installed six trains in the Eagle Ford shale, one in the Barnett shale, two in the Permian basin and one in Louisiana, for a total of about 1.7 Bcfd of capacity. We are constructing an additional train in the Permian basin, called Rebel, which will be complete in July, giving ETP a total of over 2.2 Bcfd of processing capacity. Overall, ETP produces over 130 thousand barrels per day (Mbpd) of NGL, but, together with Regency, we produce more than 200 Mbpd.

GP. That puts ETP near the top of the list for US NGL production.

Cargile. Right. If we go back to the early 1900s, Phillips Petroleum Co. was the first company to figure out how to take raw gas and squeeze the liquids out of it, fractionate the liquids and make petroleum products. So, Phillips 66 has always been the No. 1 producer of NGL in the nation. After they merged with Duke Energy Field Services, they became DCP Midstream.

Since the shale revolution, all the rich associated gas has allowed a lot of people to catch up. Looking at ETP’s journey, we weren’t even in the top 10 in 2010. Today, we are around No. 3. With everything we’ve got planned during the next several years, we think we could be right up at No. 1 or No. 2. That’s just how quickly we are moving toward liquids assets.

GP. What are your major plans going forward?

Cargile. We continue to follow the customer, follow the drill bit. You know, when the shale revolution started, everybody moved into the dry gas shales. That was good for us, as a dry gas transmission pipeline operator. But as gas prices dropped from $13/Mcf to $2/Mcf, and the basis collapsed throughout the nation due to shale development closer to the market areas, the upstream operators moved to the wet gas regions to chase the oil. That’s why we moved over to liquids.

The drill bit basically left the dry shales. There are a couple more areas we’d like to get into. We are a little bit into the Marcellus with some gas gathering and ethane exports, but we’d like to get more into the gas processing and the extended-value vertical chain of services, and we’d like to get into the Bakken, where producers are still flaring quite a bit of gas.

GP. For future growth, does ETP plan to buy or build?

Cargile. Both. ETP has a reputation for acquiring value-added assets and companies. Not only has ETP acquired Louis Dreyfus, Southern Union and Sunoco, but Regency has also recently acquired Eagle Rock, PVR Midstream and Hoover. And we continue to grow organically. We will continue to build off our footprint, such as leveraging our La Grange system in the Austin Chalk to expand into the Eagle Ford. There, we added gathering and processing and hundreds of miles of large-diameter pipe for gas gathering and NGL transmission, along with new fractionators at Mont Belvieu.

GP. Does ETP plan to divest any of its dry gas assets?

Cargile. No. The way our business model works, we’ve sold firm transportation capacity out of areas like the Barnett, Fayetteville or Haynesville shales. So, we continue to collect demand charges for that capacity. It is getting really interesting how the energy flow dynamics in the nation are changing, and ETP is well positioned to take advantage of that opportunity.

For example, the Marcellus basin has grown from 8 Bcfd to 14.5 Bcfd during the past few years and is expected to be at 16 Bcfd by year-end. Some analysts believe it could go north of 20 Bcfd. It was recently reported that if Marcellus was a country, then it would be the seventh-largest gas producer in the world, and it is expected to produce more than Canada by year-end.

Today, gas no longer needs to be moved from the southern production areas of Texas, Oklahoma and New Mexico to the northeastern states. That’s why companies like ours are repurposing lines, or reversing them, or converting them to crude. For now, the emerging markets are really down along the Gulf Coast. Florida, for example, is exporting its coal and converting its electricity generation from coal to natural gas. We are seeing industrial growth along the Gulf Coast with these petrochemical and GTL plants. These emerging markets will consume about 3 Bcfd to 5 Bcfd of gas. Mexico is looking to convert to natural gas, so it is looking for 4 Bcfd to 5 Bcfd from the US. Also, there are a few LNG facilities planned to be built along the Gulf Coast that have already been approved by the US Department of Energy. These facilities will demand another 10 Bcfd of gas.

When it’s all added up, there are about 20 Bcfd of growth along the Gulf Coast. Since ETP owns the largest intrastate pipeline system in Texas, we are well positioned to get the gas from the fields to the existing market hubs and emerging markets by building new headers to lay pipe to Mexico and to feed the LNG terminals. We are not looking to divest these assets. We will look to reverse flow to take advantage of the emerging markets along the Gulf Coast.

Also, as LNG exports potentially grow up to 10 Bcfd, the gas prices might firm back up to around $6/Mcf to $8/Mcf. With that price range, we might see the drill bit go back to the dry shales.

GP. Has the past cold winter affected ETP’s operations?

Cargile. A lot of the people that were impacted had production in the Rockies, Midwest and Northeast, where they had freeze-off problems. Much of our supply is from Oklahoma, Texas and New Mexico, so we didn’t see a lot of disruption in gas supply. However, it produced opportunities in a couple of ways.

For one, it produced an opportunity to take gas out of storage. In 2013, the nation was above the five-year average for gas in storage. This March, we were below the five-year minimum, which is now down to less than 1 Tcf. It’s also created some basis opportunities because the exceptionally cold winter created a much bigger demand for gas. ETP was able to take advantage of basis spreads and storage withdrawal this winter.

As a nation, we produce about 66 Bcfd of gas. However, when the cold snaps hit in January, we were consuming 138 Bcfd. The last record, I believe, was set in 2005 at 121 Bcfd. So, we broke several records this year in consumption. The North experienced a high demand in propane. There was also a high propane demand from farmers who use propane to dry their crops, which is the reason the industry saw propane prices firm up for a while.

GP. With all this buildout throughout the midstream industry, when do you think the work will be done?

Cargile. There was a CEO in the Permian basin that was asked, as an analogy of a baseball game, “In what inning is the Permian basin development?” He said, “We are not in any inning, we are still in the batting cage.” He meant that we are just starting. Regarding midstream, the master limited partnership tax status has attracted a lot of capital, including from private equity, and that has accelerated this infrastructure buildout.

Existing infrastructure in these shale plays is not sufficient to keep up with the development. There is a consistent need for new services, because as soon as an exploration and production company moves into a shale, they worry about oil takeaway capacity and they bring in trucks and trains. Then, eventually, crude oil pipelines are built. Then they need gas gathering and processing plants. Then they require NGL transportation and fractionation.

For example, the Eagle Ford was known as an infrastructure desert at one point. Now, it has been built out. As you knock out what you need for crude oil, gathering, processing, NGL transportation and fractionation, then, all of the sudden, the residue gas takeaway opportunity pops up and you offer those services.

I think producers have determined that to produce their oil, they must also have a market for the residue gas. As the flow dynamics of the nation change, they know this gas will not move to the Northeast. So, now they have these new emerging markets along the Gulf Coast. It’s interesting how the shale technology has changed the way this industry operates. It’s not only changing the gas and liquid flow dynamics in the nation, but it’s also changing the feedstock that goes into refineries and petrochemical plants.

More petrochemicals are coming online in 2017, and they are moving more toward the lighter end of the hydrocarbon chain. Olefin crackers are switching from naphtha feedstock to ethane, and refineries are retooling to refine lighter crude oils. When you change the feedstock, you also change the products coming out. Since the nation now makes more gas liquids than it can consume, some of those have to be exported. The shales have changed the energy landscape all the way through the value chain. I see a bright future for several more years.

GP. Over the past years, what has been the major change in the industry?

Cargile. Due to the shale revolution, the past 10 years have been exciting. The shale development is driving the US economy by creating jobs, enriching land owners, producing taxes to support our communities, spurring new infrastructure buildout (restaurants, hotels, roads, housing, etc.) and increasing demand for steel and equipment—all of which results in producing an abundance of affordable, clean-burning natural gas. This gas is lowering our nation’s emissions and leading to cheaper manufacturing and exports, which, in turn, is improving the US trade balance.

Without the shale development, this nation would have fallen off the fiscal cliff a long time ago. ETP has moved fast to follow its customers by diversifying geographically, extending its footprint to create critical mass. It has also changed its asset platform, extending the vertical value chain by moving to liquid assets and serving emerging markets. It’s been very exciting and a lot of fun. GP

Richard Cargile joined Energy Transfer Partners LP (ETP) in March 2012 and serves as president of midstream for ETP. He came to ETP with more than 30 years of midstream experience, most recently serving as president of DCP Midstream’s southern business unit. His responsibilities include executive management of ETP’s midstream assets, including operations, engineering, environment, health and safety. He oversees the gathering and processing, interstate and intrastate pipelines; LoneStar NGL; and storage assets across the ETP enterprise. Additionally, he manages SEC Energy (compression packaging) and PEI Power (electricity generation).