Stardust, And Much More - SCOOP/STACK Gas Takeaway Needs and the Midship Announcement

Cheniere Energy last Friday announced it has signed precedent agreements (firm capacity deals) with foundation shippers for its 1.4-Bcf/d Midship Pipeline project, which is targeted for an early 2019 in-service date. The announcement marks the latest milestone for midstream companies looking to move natural gas production from the SCOOP/STACK shale plays in central Oklahoma to growing demand markets in the Southeast and along the Texas Gulf Coast. Production from SCOOP and STACK grew by 1.0 Bcf/d, or 60%, in the past three years to 2.7 Bcf/d in 2016 and is expected to grow by another 1.5 Bcf/d by 2021. Besides Midship, there are other projects vying to move SCOOP/STACK gas to market. But how much capacity is really needed and by when? Today we look at the Midship project and its role in alleviating potential takeaway constraints.

We’ve written extensively in recent weeks about the growing interest in Oklahoma’s South Central Oklahoma Oil Province (SCOOP) and Sooner Trend Anadarko Canadian Kingfisher (STACK) shale plays. Cheniere’s announcement is the latest confirmation that the market is gearing up for substantial natural gas production growth out of the SCOOP/STACK shale plays. As we’ve described in our “Stardust” blog series, the SCOOP and STACK have emerged as two of the fastest growing shale producing regions in the U.S.  Drilling activity in this 11-county tract of central Oklahoma primarily targets crude oil, natural gas liquids (NGLs) and condensates in the Woodford and Meramec formations of the Anadarko Basin (see Scoop-y Doo and All Come to Look for a Meramec), but that brings with it significant volumes of associated natural gas. The value-add of multiple product streams, combined with the well performance and drilling efficiencies achieved in the region, provide some of the most attractive economics in the country for producers, including healthy double-digit internal rates of return (IRRs)—even at sub-$50/bbl crude oil prices. Related analysis of breakeven gas price also shows that even if oil were to drop to $30/bbl and gas prices fell to zero, producers in several of the best counties in SCOOP and STACK still would at least break even (see Part 3).

It’s no wonder then that rig additions in the U.S. Midcontinent region in recent months have largely targeted the SCOOP/STACK. As drilling activity has favored the SCOOP/STACK over other producing areas in Oklahoma or even the Midcontinent region as a whole, SCOOP/STACK production has increased as a percentage of overall regional production. For example, back in 2013, SCOOP/STACK production was about 30% of the about 5.5 Bcf/d total in Oklahoma. Just three years later (in 2016), it accounted for 40% of the nearly 6.9 Bcf/d total Oklahoma production.

The attractive economics and rising rig counts mean production from the area also will continue climbing. However, the question is, will processing and pipeline takeaway capacity be sufficient to support the drilling activity? In Part 4, we looked at the region’s existing and planned processing capacity and found that there is about 4.0 Bcf/d of processing capacity already operating in the area and a number of new gas plants are due in service over the next several months. Thus, for now, there appears to be sufficient processing capacity to serve production out of the SCOOP and STACK counties for the next few years. Next, we turned our focus to the pipeline takeaway capacity—first from the Midcontinent (Midcon) region as a whole (in Part 5) and then from Oklahoma and the SCOOP/STACK counties (see Part 6). Our analysis concluded that production has some room to grow before it begins to face capacity limits. But as gas production is expected to continue growing long-term, eventually the region will need more takeaway capacity. To see when constraints might develop, however, we overlaid the SCOOP/STACK takeaway capacity on top of our production outlook for the two plays, as shown in Figure 1.