U.S. Pipeline Boom Could End In Crisis

By Irina Slav - Apr 29, 2019, 2:00 PM CDT

An oil and gas building spree in the United States might have a serious boomerang effect that could hit the industry as hard as a changing fundamentals landscape hit the coal industry in the 2010s, a report from Global Energy Monitor has warned.

According to the report, there is US$232.5 billion worth of new oil and gas pipelines being planned and built right now in North America, with most of this in the United States. This expansion, however, does not rely on an increase in domestic demand for oil and gas. It relies almost exclusively on demand growth in Asia, much like the coal expansion in the 2010s. That, however, went awry, decimating the coal industry.

The factors that could ruin the pipeline expansion in the United States include demand patterns in that key Asian market everyone is targeting as well as changing attitudes—and legislation—concerning climate change and the oil and gas industry.

Asia, and particularly China and India, the continent’s largest economies, have become the top target market for all commodity industries, but the Asian markets are particularly important for the energy industry. Demand for fossil fuels in Europe, for example, is falling steadily under the pressure of climate change-related legislation and changing climate attitudes.

Even in the United States, the EIA has projected a slowdown in oil and gas demand growth, which, according to Global Energy Monitor, means the domestic market would not be able to take all the additional oil and gas coming in from the shale plays that are driving the overall growth in fossil fuel production. In China and India, conversely, energy demand, including oil and gas demand, is on the rise. For now.

Referring to a term coined by John Maynard Keynes—“animal spirits”—the report explains the ambitious expansion plans of energy companies in the U.S. with a misleading sense of optimism that the current supply and demand dynamics will continue. In other words, pipeline builders falsely believe Asian markets will continue to be as thirsty for U.S. oil and gas—especially gas—as they are now. This, according to Global Energy Monitor, is not the case.

Natural gas supply from the Middle East, for one, is on the rise and this rise will hit 65 percent between 2017 and 2040, according to the IEA. What’s more, China’s own domestic production of natural gas is set for a jump of 142 percent by 2040.  A strong increase in gas production is expected in Africa and South America as well, with the global total rise at 46 percent, versus 36 percent in the United States. In other words, the U.S. is by far not the only place where gas production is on the rise, which means a lot more intense competition in the coming decades.

Then there is the climate change factor that is increasingly likely to begin pressuring demand for oil and gas in all markets. As one of the authors of the report put it in an interview with Engineering and Technology, “The IPCC has made it clear that emissions in the oil and gas sector need to level out quickly and significantly decline in the next decade. That is incompatible with investments in more oil and gas infrastructure.”

While it remains doubtful how successful governments’ efforts in the emission-cutting respect will be, the fact remains that such efforts are being made, including in that most desirable of all Asian market where reducing oil and gas consumption is not just a question of emissions reduction, but of reducing the energy import bill.

It seems the risk comes from the belief that the status quo will continue indefinitely. This, however, is not the case and investors should think twice before taking part in new pipeline construction, Ted Nace, executive director of Global Energy Monitor said.

“The oil and gas industry is shaped by the familiar patterns of the boom/bust cycles that characterise extraction,” he told Engineering and Technology. “It’s easy to shift drilling rigs in and out of deployment. But midstream infrastructure is fundamentally different. Investments are for 40 to 50 years. The industry does not seem to realise how quickly the landscape is shifting as costs for renewables and storage fall very rapidly.”

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I understand the gist of this article, but the only crisis I see is that the NG pipeline market may become over-built, which will have a negative effect on the owners/investors of those pipelines.  Not sure I how this is truly a crisis for mineral or royalty owners.  Many of the proposed NG pipelines we read about these days are trying to get NG supplies to underserved markets, or newly built or planned chemical plants, and, of course, to the rapidly developing LNG export plants.  If the pipeline market becomes flat, the owners will have to adjust their transport rates, and I don’t see that hurting us mineral/royalty owners.  The key issue, which the article deals with, is the market for NG, both domestically and internationally.  My bottom line is that i may continue to see low NG prices for years to come, or gas left in the ground because of that low price.

Do you know Wood MacKenzie?  As far as I know the company is well thought of and regularly turns out interesting in depth research and analysis.  I have done some research work for their head of Lower 48 Upstream and so I am on their email list when they publish papers.  The one that I have on my desk currently is almost a year old (June 2018). The title is, "Thinking global energy transitions:  the what, if, how and when".  Here is the first paragraph of the summary.  "The global energy transition (GET), now well underway, casts a long shadow over the future of oil, gas and coal markets.  Yet it remains shrouded in mystery with wide-ranging opinions on what will happen and how fast it will unfold.  This thought leadership insight, the first in a series on this theme, focuses on the what, if, how and when of the transition."

The summary is 8 pages and ends with, "Conclusion:  GET is unstoppable but it can only go so fast."  Throughout the summary the case is made for the "point of singularity" to be fifteen years away.  So, 2033.  Their forecast is for incremental energy source switching until that time and then a major transition basically ends the era of hydrocarbons.  It is a very thought provoking analysis and all I have is the summary.  It was free! The full reports are a little pricey for my budget.  I am anxious to see the summary for the 2019 version of the report. 

My take away is that any major investment such as oil, NGL or natural gas pipelines may not be economic past the singularity.  Whenever it comes.

I am vaguely familiar with Wood MacKenzie.  I don’t necessarily disagree with the point, but NG will continue to have a long tail.  People aren’t going to rush out and get rid of their gas furnaces and gas cook tops, there will continue to be a need for NG as a feedstock in industry, etc.  The huge consumers of NG, power generation plants, may well drop off more quickly.  Unless governments intervene and require their immediate shut down, that will have a tail as well.  All over the US, there are new NG power generating plants being built, or coal plants being converted.  Rate-payers may be reluctant to abandon those plants and pay for newer technology.  And as we see today, it isn’t easy for government to force those actions unless there is a ground-swell of support.  Can battery storage become so light and efficient that commercial jets can abandon jet fuel as their propellant?  

It would be interesting to see how they arrived at 2033 as “the year.”. There are so many variables, many of which are difficult if not impossible to pin down.  

But, back to the article you posted, the proposed pipeline projects are a small part of the overall equation, and I’m not sure how concern over those can constitute a crisis.  

But I’m certainly no expert.  The problem is that there are too many experts, and their opinions on many aspects of energy use and transformation are all over the map.

I'd lay my bets with the pipeline folks before these squirrels.

The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change.

The investors laying the pipelines are way smarter than the academics creating and studying computer generated climate change models.

Natural gas will be the energy leader for heating your home and cooking your bisquits worldwide until it's gone and no more exists.  The climate change hoax will soon go the way of Russian collusion.  JMO JMO JMO JMO JMO

Although there are myriad uses for natural gas, as you mention, if utility-scale electric generation moves more quickly to alternate energy sources, can residential use, LNG and chemical feed stock maintain sufficient demand to make drilling wells and operating pipelines profitable?  I think Wood MacKenzie would be considered to be among the recognized top industry experts.  I am wondering if advancements in renewable energy since the data was crunched for the 2018 article have evolved to the point that the point of singularity is now earlier than 2033.  From what I am reading that would make some sense.

There’s a good chance that the domestic use of NG won’t justify further E&P in the 2040’s, but there will be continued production from existing fields.  

The logistics of switching over the world from fossil fuels to alternative fuels are daunting.  Operating pipelines will, in my opinion, continue.  the gist of the article that started this discussion is whether or not we will need all of the new pipelines currently being built/proposed.  different issue.

As domestic natural gas production goes down, so does the need for the level of pipeline capacity anticipated if all the proposed new lines are ultimately built.  I agree that production will continue even as drilling slows and some reserves become non-economic.  If the demand growth in Asia does not materialize to sufficiently support the increased transportation volumes, domestic use may be insufficient.  In that case some existing pipelines will not be needed and will cease to operate.

Pipe lines transport more than natural gas.  They also transport crude oil.  And even at one time were used to transport coal, yes coal.   The coal is pulverized and water is used as a carrier.  It certainly works in short applications.  No matter, there is an abundance of natural gas in the US and we have begun to export it via natural gas liquification (aka LNG), compress it to a liquid state, put it on ships and send it over seas to China and India plus Europe.  Qatar is a big exporter of LNG.  Soon Israel and Egypt along with Crete will be big exporters.  Indonesia and Australia are exporters.  Russia is yet another exporter.  Natural gas is going to be the fuel of the future, cleaner than coal, and easier to transport.  We have been sending natural gas to New York state from the Gulf Coast for years now from the Henry Hub.  Henry Hub is where 12 pipelines come together, some of them supply gas and some of them ship gas to places like New York and the east coast.  Henry Hub is at Ethel, Louisiana and that is where the price for natural gas is set daily.

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