Ziff Energy Group announced the release of a new report on June 29 that offers interesting insights into current trends in pipeline construction costs.
The cost analysis - Pipeline Cost in Shale Gas Regions - was performed by Ziff Energy gas analyst Julia Sagidova and was focused on large pipeline projects in what she has termed the "seven sisters" of North American shale gas: Marcellus, Eagle Ford, Haynesville, Barnett, Woodford, Fayetteville, and Horn River. The study yielded interesting results in terms of average cost per inch-mile of North American pipeline, the reasons for rising average costs, and the most and least expensive plays in which to build new pipelines.
"She analyzed twenty-five pipeline projects in North America," explained Bill Gwozd, Vice President of Gas Services for Ziff Energy. "Actually, a bit more than that. And when she was doing it, she found too many projects. Even more than twenty-fve. And so she made a [criterion] that the project has to have capacity of greater than 0.1 bcf a day. And it has to cost more than $100 million US. It could be $100 million CDN. It's about the same number. So, she didn't want to include small projects in her system, otherwise you get too many [projects]."
Sagidova quickly discovered that the majority of projects that fit that first criterion were in regions of shale gas development. Gwozd even noted that there were very few new gas pipeline projects in western Canada at the time the analysis was conducted apart from extensions into the Horn River and Montney gas plays. He also explained that the majority of new projects are in shale gas regions because unconventional resources make up one area of the industry that is experiencing an increasing amount of development, whereas the conventional side doesn't even need all of its existing infrastructure at this point.
"For example, Gulf of Mexico used to be 16.0 bcf and now it's 6.0 [bcf]," said Gwozd. "How many pipes do you need to transport shrinking Gulf of Mexico production?
"Western Canada used to be 17.0 bcf and now it's 13.0 [bcf] and change," he noted, adding that unnecessary western Canadian pipelines had already been constructed in the past and so surplus capacity for transportation of conventional resources already exists in that region.
Consequently, the second criterion for the analysis was that the projects had to fall within shale gas regions.
"And so the new pipes are really designed to take away growing supply from very specific locations," said Gwozd.
The cost analysis was based on numbers provided by the engineering teams from individual pipeline companies concerning over 120 projects from the past decade. It was determined that the cost of pipeline construction has tripled since 2004 to an inch-mile cost of nearly $200,000.
Ziff Energy doesn't like to give away all their secrets, but Gwozd did point to a few factors that have led to this rise in cost, not the least of which is the fact that the price of steel has gone up by thirty per cent since last year, now sitting at $703 per tonne.
"When you drive steel up by thirty per cent," said Gwozd, "pipe's going to go up quite a bit as well."
However, he also noted that the relatively high unemployment rate - approximately ten per cent at present versus just under six per cent in 2008 - may be offsetting the high cost of steel to some degree by keeping wages comparatively low and labour costs down.
Still, the growing cost of pipeline construction is undeniable. The present inch-mile cost is about $188,000, a steep increase from the approximately $66,000 per inch-mile cost of 2004 or even the approximately $110,000 per inch-mile cost of 2007. Although the recent jump in steel price definitely plays a role, it is not the only factor. For example, Gwozd remarked that new industry regulations and practices in terms of reducing the width of right-of-ways and minimizing environmental disturbance certainly have an effect on cost.
"Maybe the diameters are thicker now as you get more encroachment on communities," he added. "You're building pipes in populated areas. Steel has to be a bit thicker to get the proper protection [and] safety allowances."
That idea also plays into the disparity between the most expensive and least expensive regions for pipeline construction. The most expensive region is the Marcellus play in Pennsylvania, where construction costs as much as $300,000 per inch-mile. Among the least expensive is the Horn River Basin in northeast British Columbia with an approximate inch-mile cost of just $90,000.
"People cause more costs," said Gwozd, explaining that a major difference between Marcellus and Horn River is that Marcellus is a fairly densely populated area with numerous communities while Horn River is relatively quite remote and sparsely populated.
"It's kind of remote country," he added, speaking of Horn River. "It's not what you'd call burdened with city life. And so it's probably better from that perspective."
Sagidova also determined that the low cost of construction in Horn River is also largely due to who is doing the construction.
"TransCanada is a very experienced builder of pipelines," said Gwozd. "They do that for a living. Their stomping ground is the Horn River area."
dgr"[Sagidova] looked at TransCanada," said Gwozd. "And they were going to spend around $310 million for a 96 mile, 36 inch diameter pipeline. ... So, it's around $90,000 per inch-mile. And that would come in at the low end of the overall average for North America. In fact, Canada, for the couple projects we looked at, was a little over $100,000 [per inch-mile]. So, Horn River's probably at the low end overall."
Another interesting item mentioned by Gwozd is that natural gas liquids (NGL) projects also had a lower average cost than dry gas projects. They were probably about half of the overall cost of the gas pipelines," he said. "Even a third. So, the liquid pipe projects were much lower in cost."
"Some of them were smaller," he continued, explaining the difference. "And they're moving volume. And it's usually just pipe with pump stations. [Gas] pipelines quite often [have] compressor stations, which are large and expensive. So, liquid pipes are a little simpler."
Gwozd expects that this new report will have about 1000 subscribers ranging from pipeline developers to steel manufacturers. He explained that this average cost estimate of $200,000 per inch-mile allows developers to do "back of the envelope calculations" for the cost of a new pipeline and the toll they will eventually charge its users.
"You can very quickly find an order of magnitude tariff just during your lunch hour, without even having any analyst beside you," he added. "And you're probably within twenty-five per cent accuracy, because you start off with a solid cost estimate for the pipeline."
"If you're a steel manufacturer and you want to know how many more pipes are going to be built," Gwozd continued, describing another application. "As costs rise, maybe less pipes are going to be built, because it's going to cost more and more to transport. So, that could put downward pressure on the pipeline sector and maybe more focus to drill wells. They may convert their steel to tubular goods versus pipeline goods. So, it gives people the market size."