distribution

For the past decade or more, master limited partnerships (MLPs) have been one of the most popular forms used by energy companies to capitalize themselves and one of the most rewarding for their investors. These investments offered income, in most cases steadily growing, at a time of historically low interest rates.  They also offered capital appreciation as the sector more often than not was one of the best performing in terms of equity returns.  So what explains the rapid collapse in value that has been experienced over the past few months?  Today in Part 2 of RBN’s series on MLPs, we delve further into that question, looking at Incentive Distribution Rights (IDRs) and our friends at Alerian provide a list of 118 MLPs including the “IDR splits”.

It’s hard to imagine how the massive build out of pipelines and processing plants required to deliver shale hydrocarbon production to end use markets in the past 5 years could ever have occurred without the corporate structures known as Master Limited Partnerships (MLP’s). These tax-efficient vehicles financed shale infrastructure by selling partnership units to investors that offered income in the form of cash distributions as well as growth from increasing unit prices. But the leading Alerian AMZ Index of MLP market capitalization fell 46% from August 2014 to December 31, 2015 in the wake of the oil price crash. Today we begin a series looking at past success and future prospects for MLPs.

As North American supplies of natural gas continue to grow, more industrial, commercial, institutional and residential customers who do not burn natural gas for heating or process use want to participate in the economic savings associated with natural gas versus alternate fuels such as heating oil or propane. Complications in the process of installing pipeline infrastructure are slowing the rollout of direct gas line service. Today we describe natural gas distribution alternatives.

We’ve talked here frequently about the two ends of the Natural Gas Liquids market.  On one end we have the commercial aspects of the business – things like pricing, differentials, processing economics and feedstock selection calculations.  At the other end, there is the operational infrastructure – processing plants, pipelines, fractionators and downstream demand, including olefin plants.  You may have wondered – what ties the commercial and operational worlds together?  In the NGL world, the answer is Distribution – often the unsung hero of the NGL marketplace.  Where the rubber meets the road.  Where deal-making is translated into reality.   Today we start a series of blogs to examine why NGL distribution is so important to the market, how it works, how Distribution generates value and why it is much an art as it is a science.

The Gnats Patootie

NGLs are complicated.  First of all, there are five different products included under this umbrella: ethane, propane, normal butane, isobutane and natural gasoline.  Each has different physical characteristics and different markets.  With the exception of natural gasoline, all of the NGLs require high pressure and very low temperatures to move in a liquid state. All are highly flammable, heavier than air and require special handling all across the value chain – things like processing, fractionation, high pressure pipelines, insulated trucks rail cars, and salt dome storage.  The total cost of all of this frequently can add up quickly, running over $0.20/gallon or $8/barrel, and occasionally much higher.  It seems mind boggling, and for an amateur it can be.

The good news is there are many talented people behind the scenes working to ensure this is done well and efficiently. They live and breathe in a world filled with jargon terms like pump tickets, tenders, tariffs, fuel adjustments, product losses, pipeline allocations, product specs, late fees, component balancing, Product Transfer Orders (PTO’s), Bill of Ladings (BOLs), Freight on Board (FOB), demurrage, pumpovers,  batch orders, stenched, unstenched, and the list goes on.  It is a world that does not stop at 5pm.  Product is moving 24 hours a day, 7 days a week.  Most of the time things go right.  But sometime things go wrong – mechanical failures, process upsets, product handling errors, and worse.  All of these issues must be handled in a timely, methodical and professional basis.  At the end of the day, all the paperwork (or databases, these days) must reconcile down to a gnats patootie.  That’s a much tighter specification than six sigma.

The folks that inhabit this world are the Distribution experts – who can make or break the economics for NGL transactions.  The job is Distribution.  And the process is mysterious, critical, and truly an art—an art in which the big midstream players make big investments. 

Is it just scheduling product from place to place? No, it’s a long way from that. The process involves understanding and actively engaging in every part of the NGL’s life from production to end use (like y-grade and propane in the Long and Winding Road Part I & Part II) and squeezing out every bit of value possible; down to a small fraction of a cent. It requires understanding the operations of production forecasting, gathering, gas processing and pipelines operations, high pressure tank cars, trucks, waterborne ships and barges, loading docks,  fractionation, storage – salt caverns and above ground bullets,  PTO’s (product transfer orders), computer technology, and cash flow. 

The Art and Magic of NGL Distribution

But the Distribution expert must know more than the physical hardware.  Infrastructure knowledge must be combined with a solid understanding of contract terms/flexibility, market intuition, and negotiating skills.  It is truly an art to pull all of this together in a distribution plan that can be effectively and profitably executed.  But that is still not enough.  This knowledge must be combined with the talent and skill to develop great, dependable and valuable relationships with other people in the Distribution fraternity.  It is these relationships that make the “magic” of this process happen. Some of the best in the industry have been doing this their whole career and are truly masters.

Companies who are serious about making money on NGL’s invest in the best and brightest to do Distribution for them. The large companies have Distribution experts for each product and each piece of the road. Others have experts handling larger pieces or the entire journey.

So what do most of these Distribution experts do? Just think, every time an NGL molecule changes location or changes hands a long chain of activities takes place.  Each movement must be subject to a contract between the parties.  Each transaction must be measured, reconciled and ultimately financially settled.   Frequently (but not always) the triggering event for the physical movement of product is scheduling.  That activity makes up a big part of the Distribution function, and it is a perfect place to start our journey.

Scheduling NGLs: Introducing Scenario #1

In “The Long and Winding Road”…we followed the journey of a molecule of propane from producing well to end-use market, which was a relatively typical journey.  In the background of that story there were a minimum of 7 scheduling points, requiring at least 14 schedulers, tons of technology, phone calls, emails, spreadsheets, and lots of very high (human) energy. If that journey hadn’t been so smooth, those numbers (and Advil consumption) would be on the rise. Rarely does it go that smooth. Let’s look at some other typical winding road scenarios and do a deeper dive into exactly what NGL scheduling is all about.  

“A Midwest NGL Company” (“AMNGLCo”) is a large midstream company that owns NGL assets and owns or controls production all over the US and Canada. Propane expertise has been the foundation for their success and a staple product for decades. They own it, buy it, sell it, transport it, store it, speculate on it, and build assets around it. Similar to other large midstream companies, distribution and scheduling is centralized in their home office, in this case located in Gotham City, Oklahoma. Those experts work via phone and e-mail with the “field” operations (considered all the people who physically make and move NGL’s) out and around the continent. This is an example of a company that understands the complexity and importance of Distribution and has the process down pat.

Here is just one (of many) scenarios that AMNGLCo could face every day.

“Keep (us) Dry!!!”