The Shale-driven Pipeline Future
Production from U.S. shale plays is expected to continue growing for the next few years, driving stable investment in pipeline infrastructure. The latest edition of the DW North American Pipeline Database identifies $22 billion in expenditure for the construction of over 23,000 miles of pipeline between 2014 and 2020.
Over 1,100 miles of transmission pipelines relate to the transportation of Permian crude and are planned to be built by the end of 2014. These lines will buffer the pricing of Permian crude from temporary disruptions in refineries and in the existing takeaway infrastructure and potentially enable greater volumes of production. The capacity of pipelines to be installed from the Eagle Ford by 2017 actually exceeds expected production and will similarly ensure consumers’ stable supply.
Unlike the Eagle Ford, the Bakken is challenged by its remote location, due to which Bakken oil has historically sold at a discount to WTI and Brent. Over 1,000 miles of pipelines transporting Bakken crude are planned for construction by 2016 and will collectively lower the Bakken discount (which was around $5 lower to WTI for the majority of 2013). A decrease in this discount will also diminish the cost competitiveness of rail (the primary competitor to pipeline transportation). Transportation by rail and natural gas flaring have both grown tremendously in the past several years due to North Dakota’s short construction season, rugged terrain and distance from the Gulf Coast. The extent to which flaring and rail will be replaced by pipelines in the future is debatable.
Given the volatility of energy markets and the steep production decline curves of unconventional wells, the capital cost of pipeline installation for gas transportation is often difficult to justify. The value of natural gas produced from the Bakken is, moreover, dwarfed by that of Bakken oil. About 70% of Bakken oil is transported out of North Dakota by train. Rail infrastructure is both cheaper and faster to build than pipelines, as an extensive network of railroads is already in place in the U.S., and loading and unloading terminals are the only facilities that typically require construction in the transport of crude. Moreover, contractual obligations associated with rail transport are typically only one to four years in length, a fraction of the typical 10-20 year commitments required for shipments by pipeline. Railcars can additionally transport product in both directions and often reach their destinations faster than pipelines. Pipeline operators such as Enbridge (ENB) are now investing in rail and the relative economics of rail vs. pipeline transport will doubtless be an important determinant of North American pipeline construction activity over the next several years.
The Utica Shale has lagged in production to date, in comparison to other major shale plays, but is expected to see a spike soon, largely due to impending developments in pipeline infrastructure and refining capacity. A joint venture between MarkWest Energy and the Energy & Minerals Group has commenced operations of two processing facilities with a combined 325 MMcf/d of capacity in the Utica since 2012. The joint venture is currently building two more 200 MMcf/d facilities that are expected to be in service by mid-2014. Companies such as Access Midstream and M3 Midstream are additionally building fractionation facilities which will eventually necessitate the construction of Y-grade pipelines. By 2017, the Utica Shale has been forecast to supply approximately 5% of the nation’s NGLs, trailing closely behind the Marcellus at 9%.
The third quarterly edition of DW's North American Onshore Pipelines Database Service (PDS) was issued last week. The database contains a comprehensive, forward-looking list of onshore transmission pipeline installation projects through to 2018, along with selected historical projects, gathering lines and overview analysis.