Viewing offline content

Limited functionality available

Dismiss
Deloitte South Africa
  • Services

    What's new

    • Deloitte Digital

    • Deloitte Africa Centre for Corporate Governance

      The Deloitte Africa Center for Corporate Governance offers a number of resources for executives, directors, and others who are active in governance.

    • Corporate Reporting Reform

      View our latest events on corporate reporting reform.

    • Audit & Assurance

      • Audit & Assurance Insights
      • Centre for Corporate Governance
    • Consulting

      • Strategy
      • Customer and Marketing
      • Core Business Operations
      • Human Capital
      • Enterprise Technology & Performance
      • Managed Services
      • Growth Platforms
    • Financial Advisory

      • Mergers & Acquisitions
      • Turnaround and Restructuring
      • Forensics
    • Risk Advisory

      • Internal Control & Assurance
      • Regulatory Risk
      • IT & Specialised Assurance
      • Cyber Risk
      • Analytics
    • Tax & Legal

      • Outsourced Tax Compliance
      • Tax Technology Consulting
      • Tax Advisory and Transactions
      • Mobility, Payroll, Immigration
      • Workforce, Analytics
      • Reward, Employment Tax
      • Legal Services
      • South African Budget
      • Tax News and Trends
    • Deloitte Private

  • Industries

    What's new

    • Deloitte perspectives

      Leadership perspectives from across the globe.

    • Future of Mobility

      Learn how this new reality is coming together and what it will mean for you and your industry.

    • Deloitte Africa Insights

      Access the latest thought leadership on industry insights, country reports and economic developments in Africa.

    • Consumer

      • Automotive
      • Consumer Products
      • Retail, Wholesale & Distribution
      • Transportation, Hospitality & Services
    • Energy & Resources

      • Energy & Chemicals
      • Mining & Metals
      • Power, Utilities & Renewables
      • Industrial Products & Construction
    • Financial Services

      • Insurance
      • Banking & Securities
      • Investment Management
      • Actuarial & Insurance Solutions
      • Real Estate
    • Life Sciences & Healthcare

      • Life Sciences
      • Health Care
      • The Africa Deloitte Health Equity Institute
    • Government and Public Services

      • Infrastructure, Transport & Regional Government
      • Central Government
      • Defence, Security & Justice
      • Health & Human Services
    • Technology, Media & Telecom

      • Technology
      • Media & Entertainment
      • Telecom, Media & Entertainment
      • Predictions
  • Insights

    Deloitte Insights

    What's new

    • Deloitte Insights Magazine

      Explore the latest issue now

    • Deloitte Insights app

      Go straight to smart with daily updates on your mobile device

    • Weekly economic update

      See what's happening this week and the impact on your business

    • Strategy

      • Business Strategy & Growth
      • Digital Transformation
      • Governance & Board
      • Innovation
      • Marketing & Sales
      • Private Enterprise
    • Economy & Society

      • Economy
      • Environmental, Social, & Governance
      • Health Equity
      • Trust
      • Mobility
    • Organization

      • Operations
      • Finance & Tax
      • Risk & Regulation
      • Supply Chain
      • Smart Manufacturing
    • People

      • Leadership
      • Talent & Work
      • Diversity, Equity, & Inclusion
    • Technology

      • Data & Analytics
      • Emerging Technologies
      • Technology Management
    • Industries

      • Consumer
      • Energy, Resources, & Industrials
      • Financial Services
      • Government & Public Services
      • Life Sciences & Health Care
      • Technology, Media, & Telecommunications
    • Spotlight

      • Deloitte Insights Magazine
      • Press Room Podcasts
      • Weekly Economic Update
      • COVID-19
      • Resilience
      • Top 10 reading guide
  • Careers

    What's new

    • Job search

    • Experienced Hires

    • Executives

    • Students

    • Life at Deloitte

    • Alumni

  • ZA-EN Location: South Africa-English  
  • ZA-EN Location: South Africa-English  
    • Dashboard
    • Saved items
    • Content feed
    • Profile/Interests
    • Account settings
    • Subscriptions

Welcome back

Still not a member? Join My Deloitte

Midstream: Charting a new course amid market dynamism

by Vivek Bansal, Anshu Mittal
  • Save for later
  • Download
  • Share
    • Share on Facebook
    • Share on Twitter
    • Share on Linkedin
    • Share by email
Deloitte Insights
  • Strategy
    Strategy
    Strategy
    • Business Strategy & Growth
    • Digital Transformation
    • Governance & Board
    • Innovation
    • Marketing & Sales
    • Private Enterprise
  • Economy & Society
    Economy & Society
    Economy & Society
    • Economy
    • Environmental, Social, & Governance
    • Health Equity
    • Trust
    • Mobility
  • Organization
    Organization
    Organization
    • Operations
    • Finance & Tax
    • Risk & Regulation
    • Supply Chain
    • Smart Manufacturing
  • People
    People
    People
    • Leadership
    • Talent & Work
    • Diversity, Equity, & Inclusion
  • Technology
    Technology
    Technology
    • Data & Analytics
    • Emerging Technologies
    • Technology Management
  • Industries
    Industries
    Industries
    • Consumer
    • Energy, Resources, & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Tech, Media, & Telecom
  • Spotlight
    Spotlight
    Spotlight
    • Deloitte Insights Magazine
    • Press Room Podcasts
    • Weekly Economic Update
    • COVID-19
    • Resilience
    • Top 10 reading guide
    • ZA-EN Location: South Africa-English  
      • Dashboard
      • Saved items
      • Content feed
      • Profile/Interests
      • Account settings
      • Subscriptions
    8 minute read 23 April 2019

    Midstream: Charting a new course amid market dynamism Decoding the O&G downturn

    8 minute read 23 April 2019
    • Vivek Bansal United States
    • Anshu Mittal India
    • Save for later
    • Download
    • Share
      • Share on Facebook
      • Share on Twitter
      • Share on Linkedin
      • Share by email
    • Investors proceed with caution
    • US midstream: Both reactive and proactive strategies fail to deliver
    • Non-US midstream: Bound by regional differences
    • Lessons from the downturn

    The midstream sector is crucial for the oil and gas industry’s success, but much has changed with the entry of shales and altered trade flows and routes. How can the sector thrive amid this uncertainty?

    The midstream segment is not only a key element in the O&G industry’s biggest supply story but also appealing to many energy-focused investors for its consistent free cash flow generation in the past. However, the segment, despite its critical role and stable fee-based business model, has struggled to create additional wealth for its shareholders during the downturn as well as the recent upturn in 2017–18. The short-cycled production profile of shale resources and altered trade flows and routes have brought new challenges to this segment, keeping it under pressure. How have various sub-segments in the midstream segment responded to this complex business environment?

    Although many industry pundits have provided piecemeal perspectives across the phases of the downturn and recovery, a consolidated analysis of the past five years and a complete perspective covering the entire O&G value chain could help stakeholders—from executive to investor—make informed decisions for the uncertain future.

    With this in mind, Deloitte analyzed 843 listed O&G companies worldwide with a revenue of more than US$50 million across the four O&G segments (upstream, oilfield services, midstream, and refining & marketing) in an effort to gain both a deeper and broader understanding of the industry. The ensuing research yielded a six-part series, Decoding the O&G downturn, which sets out to provide a big-picture reflection of the downturn and share our perspectives for consideration on the future.

    In part four of the series, we explore the state of the midstream segment—assessing its overall health, identifying possible reasons behind its flat performance, analyzing its investment profile, and comprehending the importance of revamping commercial and capital arrangements in this volatile market environment.

     

    Learn more

    Create custom PDF or download the full report

    Read all articles in the series—Decoding the O&G downturn

    Browse the Oil, Gas & Chemicals collection

    Read an article featuring these insights from Rigzone

    Read an interview with Deloitte’s Andrew Slaughter

    Read an article on this report from Oil & Gas Journal

    Subscribe to receive related content

    Investors proceed with caution

    A supply boom and strong demand for both crude oil and natural gas have enabled a highly advantaged business environment for midstream companies worldwide. Global O&G supply grew by 11 percent, while demand expanded by 8.5 percent over the past five years.1 Robust volume expansion (especially emergence of LNG and the coming of new supply centers) and a stable fee-based business, as expected, explain the strong growth in both top and bottom lines of midstream companies worldwide (figure 1). In fact, the companies paid dividends to the tune of US$19 billion while keeping their leverage ratio flat at 51.5 percent.2

    However, the picture is quite different on the investment and value creation front. The midstream sector has remained cautious even as upstream players expect future growth. This seems clear from falling midstream investments—midstream capex CAGR across all regions has remained in the range of -7 to -11 percent during the past four years.3 And while investors have acknowledged the discipline exhibited by companies, they expect a much faster pace of infrastructure growth to absorb growing supplies and meet latent demand—the market capitalization of global midstream companies in 2018 was 4 percent lower than in 2014.4

    Investments remained low despite strong fundamentals

    Unlike in other O&G segments and industries, investors in midstream typically use the common lens of a yield-focused mindset to evaluate the segment across the globe. However, changed supply conditions on the upstream side and varying infrastructure needs and regulations of countries could require a deeper assessment by regions and a more differentiated view by investors. While the US midstream sector seems to find it challenging to manage capital cycles in a more dynamic shale world, non-US companies are facing issues that are unique to the part of the value chain they operate in. And given the criticality of midstream infrastructure, even short-term uncertainty in resolving these challenges could pose risks to future O&G volume growth.

    US midstream: Both reactive and proactive strategies fail to deliver

    After the oil downturn started in mid-2014, midstream companies, skeptical of the sustainability of then high-cost US shale production, broke the linear relationship with upstream investments and slashed their capital programs. Despite realizing that they were risking their future growth, most midstream companies reduced their investments seeing rising cost of capital, falling returns, and high distribution commitments. But then, shale companies surprised them by delivering phenomenal volume growth even in a low-price environment. However, because of the time taken to build pipeline infrastructure, midstream companies could not catch up. The result: Many midstream companies lost notable volume growth potential as capacity bottlenecks pushed E&Ps to either delay completions or explore other transportation options.

    Realizing that being reactive was not working, most midstream players then followed a proactive approach and increased their spend on infrastructure development by 25 percent in 2017 despite their high cost of capital: ROC (return on capital)–WACC (weighted average cost of capital) spread averaged around -1 percent when midstream investments went up in 2017.5 Further, visible shale volume growth appeared to entice them to maintain their high capex in 2018 as well (figure 2). But this growth came with a high cost of capital, and thus lower margins.

    Managing high-cost investments in a dynamic shale world remains a challenge

    With oil prices falling and volatility returning in late 2018, now, there is a risk of supply growing less than anticipated or planned for. Although shale production has consistently surprised to the upside, some estimates caution against possible pipeline overcapacity of 15–40 percent over the next five years in some shale plays.6 This could explain the underperformance of US midstream companies, where both reactive and proactive investment strategies have failed to deliver in a highly dynamic shale environment.

    One may rightly argue that midstream investments self-balance over a period of time, and the lag or lead in infrastructure growth is intrinsic to this business. But shale’s dynamism and intensifying competition likely require a much closer alignment of upstream growth and infrastructure planning in the United States.

    Non-US midstream: Bound by regional differences

    Global growth in natural gas as a fuel for the future and altered trade flows due to the shale boom have had a profound impact on international midstream companies. While Asian gas distributors seemed highly cautious about the projected “high” gas demand growth in the region, the shipping industry seems to have struggled to align with changing trade patterns and geopolitical uncertainties (figure 3).

    Gas distribution: Growing strong, yet failing on last-mile connectivity

    Gas distribution companies, especially in Asia-Pacific (APAC), witnessed one of the best performance periods as low commodity prices, and growing supply of LNG from Australia and the US helped them capitalize on old infrastructure investments. Revenue and market capitalization for these companies reached an all-time high of US$86 billion and US$139 billion, respectively.7

    However, from a sector that is expected to be the backbone of future LNG growth in the region, one might also expect a solid growth plan apart from good financial performance. Instead, investments to expand the APAC distribution infrastructure reached a 9-year low of US$6.3 billion in 2018.8 What might be more concerning is that not only mature gas markets such as Japan and South Korea curtailed investments, all developing nations except China also underinvested during the past five years. The total spending level of developing countries was US$1.5–2.5 billion per annum less than their peak levels of US$7 billion in 2015.9

    A possible explanation for this seems to be the demand uncertainty from the industrial sector due to volatility in oil-linked gas prices as well as the easy availability of cheap alternatives such as coal. Moreover, inconsistent state regulations, limited access to capital, and slow-paced evolution of commercial frameworks appear to degrade the investment case—distribution companies are still batting for a fixed annuity-based pricing model that can not only take away the volumetric risk but also allow them to raise cheap capital against that annuity.

    With an intense focus on accelerating its gas economy, China implemented several pricing reforms to increase industrial demand—a 20 percent cut in nonresidential city gate price followed by the establishment of local trade hubs and exchanges.10 Even after many thoughtful efforts, the country could only keep its gas distribution investments flat, which may not be enough considering its ambitious road map to expand LNG imports. It seems to imply that gas distribution investors remain cautious and may only buy the story of LNG growth once state policies and regional pricing become consistent and predictable.

    Shipping: Sailing in troubled waters?

    Shipping and transportation companies, particularly in Europe and Latin America, saw a modest gain in the top line but witnessed one of the roughest falls in their bottom line—the companies’ operating margins fell by 20–25 percent in the past four years (figure 3).11 Unlike other business segments where underinvestment was an issue, huge capital inflows and investment during 2013–2016 seem responsible for today’s oversupplied situation in the shipping market—annual capex spends in the region during 2013–2016 was US$9 billion, as against an average of US$2–3 billion in the past.12 The result: Since 2016, fleet utilization and freight rates (excluding for LNG) have collapsed by 80–90 percent.13

    This buildup in capex, or demand estimation, was in anticipation of connecting new supply centers (including shales) with established demand centers. New supplies came, but they changed the state of the O&G industry to a buyer’s market, added significant volatility to crude and natural gas price differentials between markets and grades, and altered established trade flows and shipping routes. The problems of overcapacity were possibly compounded by the potential of a trade war, US sanctions on Iran that reduced ton-mile demand due to fewer long voyages, construction of many cross-country pipelines (Sino-Myanmar, Sino-Russian, East-West Petroline, etc.), and tighter regulations on the emissions front.14

    Although rising LNG trade is providing one source of growth to the sector, the performance of oil and product transportation is still key for generating predictable cash flows. It is likely that the opportunities in the liquids market might be limited in the future and could need timely actions to monetize. Some of those include potential increased product movement due to huge investments in the Middle East, International Maritime Organization (IMO) 2020 regulations, and aging very large crude carriers (VLCCs).15 Also, it is time that O&G ecosystem should realize the importance of shipping for future growth and enable an environment where this sector could generate sustainable returns.

    Lessons from the downturn

    The global midstream industry seems to be in a phase of transition, whether in its growth and investment cycle, the mode and cost of raising capital, or variability and competition in the business. The issues and even the opportunities are often very region-specific in this sector and so will typically be the strategies to successfully navigate this environment. However, some broad considerations could help companies prioritize their focus areas:

    • To minimize lag or lead in their infrastructure planning, US midstream companies may adopt new commercial arrangements that optimize risk–reward between operators and shippers. Contracts, for example, where midstream companies pay an upfront rebate in exchange for dedicated throughput, and even linking these rebates to some key upstream performance metrics (drilling or volumetric efficiencies).
    • Shipping companies could start to differentiate themselves by delivering extra value to their clients by leveraging digital solutions. By running advanced autotuning algorithms on diverse data sets (spot prices, contractual obligations, port fees, weather data, etc.), shippers can not only help upstream players seize spot opportunities, but also turn idle asset time into opportunity, manage disrupted schedules due to end-market constraints, and understand the exact financial consequence of day-to-day business decisions.
    • Gas producers and distributors along with local regulatory bodies can attain last-mile connectivity and overcome demand uncertainty issues by using market-based pricing mechanisms instead of multiple formula-based prices, becoming indispensable partners of governments in making their smart cities program a reality, and exploring new contracting models such as gas trading among bulk gas purchasers to even out seasonality in demand.

    Midstream is both a driver and beneficiary of the tight oil boom and rising trade of natural gas worldwide. However, it is essential for midstream companies to stay ahead of evolving market dynamics so that infrastructure, time, and capital are allocated to where they are most needed and become a win-win for all stakeholders. Given supply and demand of fuels determine infrastructure needs, having a complete perspective across the O&G value chain is critical for midstream companies. Explore the entire Decoding the O&G downturn series to gain a 360-degree view on the industry.

    Acknowledgments

    A number of leaders and colleagues within Deloitte member firms generously contributed their time and insights to this report. In no particular order, the authors would like to thank Rajeev Chopra (partner, Deloitte Global), Michael Lynn (partner, Deloitte Australia), and Roland Labuhn (partner, Deloitte Canada) for their review and contributions to this research.

    We would also like to extend our special thanks to John England (partner, Deloitte US) and Scott Sanderson (partner, Deloitte US) for their perspectives and suggestions on the entire series. Thanks also to Rithu Thomas (editor), Sharene Williams (chief of staff), Jennifer McHugh (OG&C sector specialist), Joanna Lambeas (marketer), Dana Kruse (marketer), Mindy Porter (marketer), and Laurel McConn (marketer) for providing valuable inputs, extensive marketing support, and critical editorial help at important junctures.

    Cover image by: Swagata Samanta

    Endnotes
      1. US Energy Information Administration; BP, “Statistical review of world energy,” accessed February 2018. View in article

      2. Data taken from S&P Capital IQ. View in article

      3. Ibid. View in article

      4. Ibid. View in article

      5. Deloitte, Back to basics: Solving the capital conundrum of US midstream companies, 2018. View in article

      6. Credit Suisse, 2019 midstream outlook, January 07, 2019. View in article

      7. Data taken from S&P Capital IQ. View in article

      8. Ibid. View in article

      9. Ibid. View in article

      10. Duan Zhaofang, China natural gas market status and outlook, CNPC, November 8, 2017. View in article

      11. Data taken from S&P Capital IQ. View in article

      12. Ibid. View in article

      13. Peter Sand, “A historically bad crude oil tanker market struggles to find solid support,” Bimco, July 10, 2018. View in article

      14. Mfame, “Added uncertainty is not helpful to the struggling tankers,” June 1, 2018. View in article

      15. Hellenic Shipping News, “Euronav offers encouraging news for tanker owners of VLCCs,” January 25, 2019. View in article

    Show moreShow less

    Topics in this article

    Oil & Gas , Energy & Resources , Energy, Resources, & Industrials

    Digital Oil, Gas & Chemicals

    With its breadth of experience in working across the crude oil and natural gas value chain, Deloitte helps clients anticipate the changing landscape and take advantage of emerging opportunities. Deloitte can help clients uncover data-driven insights to inform vision, strategy, and decision making; provide insight into current and shaping trends; assist executives in delivering value to their shareholders; drive operational excellence and prudent capital management across a company; identify, analyze, and perform due diligence for acquisition opportunities; transform business models to capture new growth opportunities; and apply technologies to achieve business goals. Reach out to any of the contacts listed at the end of this document for more information.

    Learn more
    Get in touch
    Contact
    • Andrew Slaughter
    • Executive Director
    • Deloitte Services LP
    • anslaughter@deloitte.com
    • +1 713 982 3526

    Download Subscribe

    Related content

    img Trending

    Interactive 3 days ago

    More insights for Oil, Gas & Chemicals

    • Energy & Chemicals Collection
    • From bytes to barrels Article5 years ago
    • Refining at risk Article5 years ago
    • Following the capital trail in oil and gas Article7 years ago
    • A renaissance in the domestic oil and gas industry Article9 years ago
    • Global renewable energy trends Article4 years ago
    Vivek Bansal

    Vivek Bansal

    Senior Analyst | Deloitte Services

    Vivek is a senior analyst in Deloitte Services LP’s Energy & Resources Research & Insights team. He has more than five years of strategic research and consulting experience in the upstream and downstream sub-sectors. During his tenure at Deloitte, Vivek has contributed to several oil and gas white papers focused on aspects such as Internet of Things, cybersecurity, capital migration, and portfolio management. He holds an engineering degree in applied petroleum and a masters in oil and gas management.

    • vibansal@deloitte.com
    • +1 615 718 1690
    Anshu Mittal

    Anshu Mittal

    Executive Manager | SV Research & Analysis

    Mittal is an Oil & Gas research manager on Deloitte Services LP’s Research & Eminence team. Mittal has close to 12 years of experience in financial analysis and strategic research across all oil and gas subsectors—upstream, midstream, oilfield services, and downstream. Before joining Deloitte in 2005, Mittal worked with Credit Rating Information Services of India Limited, a subsidiary of Standard & Poor’s, as a lead industry researcher in petrochemicals and petroleum sectors.

    • ansmittal@deloitte.com
    • +91 990 854 9995

    Share article highlights

    See something interesting? Simply select text and choose how to share it:

    Email a customized link that shows your highlighted text.
    Copy a customized link that shows your highlighted text.
    Copy your highlighted text.

    Midstream: Charting a new course amid market dynamism has been saved

    Midstream: Charting a new course amid market dynamism has been removed

    An Article Titled Midstream: Charting a new course amid market dynamism already exists in Saved items

    Invalid special characters found 
    Forgot password

    To stay logged in, change your functional cookie settings.

    OR

    Social login not available on Microsoft Edge browser at this time.

    Connect Accounts

    Connect your social accounts

    This is the first time you have logged in with a social network.

    You have previously logged in with a different account. To link your accounts, please re-authenticate.

    Log in with an existing social network:

    To connect with your existing account, please enter your password:

    OR

    Log in with an existing site account:

    To connect with your existing account, please enter your password:

    Forgot password

    Subscribe

    to receive more business insights, analysis, and perspectives from Deloitte Insights
    ✓ Link copied to clipboard
    • Contact Us
    • Submit RFP
    • Media enquiries
    Follow Deloitte Insights:
    Global office directory Office locations
    ZA-EN Location: South Africa-English  
    About Deloitte
    • Home
    • Newsroom
    • Code of Conduct
    • Report unethical conduct
    • Office locator
    • Global Office Directory
    • Press releases
    • Submit RFP
    • Contact us
    • Deloitte Insights Blog
    • Social Media
    • About Deloitte in Malawi
    • About Deloitte in Zimbabwe
    • About Deloitte in Mozambique
    • About Deloitte in Botswana
    • About Deloitte in Zambia
    • https://sacoronavirus.co.za
    Services
    • Audit & Assurance
    • Consulting
    • Financial Advisory
    • Risk Advisory
    • Tax & Legal
    • Deloitte Private
    Industries
    • Consumer
    • Energy & Resources
    • Financial Services
    • Life Sciences & Healthcare
    • Government and Public Services
    • Technology, Media & Telecom
    Careers
    • Job search
    • Experienced Hires
    • Executives
    • Students
    • Life at Deloitte
    • Alumni
    • About Deloitte
    • Terms of use
    • Privacy
    • Cookies
    • PAIA Manual
    • About Deloitte Africa
    • Avature Privacy
    • Standard terms for the provision of goods and services to Deloitte & Touche

    © 2023. See Terms of Use for more information.

    Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities.  Please see www.deloitte.com/about for a detailed description of DTTL and its member firms.