The four key characteristics of the midstream segment are identified in the picture below with associated further explanations.
Risk of the business
The business of moving oil and gas around is considered as a very low capital risk, which means that the chances of losing the capital investment are extremely low. Most of the assets are adequately insured but also built with a special designated purpose – to serve as the link between the critical upstream and downstream part of the business. Historically in the integrated oil companies like EXXON, the midstream segment of the business was only a small part of their operations. However, it was not until the advent of new technological discoveries in the 1980s that more companies started to look more seriously at this segment of the business as a serious value creator. They spun-off these assets into publicly traded independent businesses that created a whole new stream of income for their shareholders.
Regulation of the mid-stream business
The midstream gathering and processing sector are relatively free of government regulation. It would be interesting to see how much capacity the Guyanese authorities will build to empower the State to have clarity around how much barrels of oil are being shipped from the well site annually. This issue is a highly political one that is hardwired for corruption if not effectively monitored. Trust but verified should be the mantra of any Government of Guyana with respect the measurement of the crude being pumped. The pertinent question remains – will Guyana have the capacity in place by 2020 to properly measure the crude pumped from the well so that it can own the calculation of how much cash will flow into the local Treasury?
Stuck in the middle
This segment of the business is literally stuck in the middle. If the exploration and production side of the business is unhealthy and not producing at the right pace, then the processing, transportation and storage system will be working sub-optimally. Similarly, if consumer demand at the pump is also poor, then the need to bring the products to the industrial, commercial and retail market will diminish. So this consideration illustrates how little control Guyana has over this operations because there are transnational factors that will contribute to the daily production numbers rather than the needs of the Guyana Treasury.
The price of oil at the pump
If the price of oil declines materially, it can cause the entire industry to slump into a protracted downturn and no President of Guyana will be able to tell EXXON to ramp up production if they think it is in their best interest to pump at 40,000 bpd rather than 100,000 bpd. Over the last four years, the price of crude was basically going in one direction and that direction is not North. Getting a price about US$65 a barrel before 2020 will require divine intervention in my opinion, unless of course America goes to war with Korea.
4 major components of the midstream business
1. Gathering – the first step in the midstream business is field gathering. Oil comes from many wells and therefore the product has to move through a “spider web” of many small diameter pipelines to a central location (in Guyana’s case the floating production storage and offloading unit – FPSO).
2. Field processing, storage, and offloading (FPSO) – requires surface units that are designed and installed to:
a. Measure the production rate from the reservoir;
b. Separate the crude from the wastewater;
c. Temporarily store the crude until it is ready to be moved to the refinery.
3. Transportation – Treated crude is carried via huge supertankers or an oil pipeline to the refinery. In the case of Guyana, these big ships will lift the crude from the FPSO and take it away to a refinery somewhere in the USA. This begs the question where are the plans for the modular refinery to process Guyana’s portion of the oil?
If the natural gas deal succeeds, it can see huge pipelines being built into a GPL production facilities, for example at Vreed-en-Hoop, since it will be a logistic nightmare to bring such a pipeline into Port Georgetown.
4. Storage – This part of the midstream process is pretty straightforward and Guyana already has experience in this area. The main form is the onshore bulk terminals and the offshore FPSO (a very large ship anchored close to the production site).
Next week, I shall move to introducing the downstream segment of the business.
