Shale-Related Midstream Infrastructure: Where the Action Is!

By Richard Nemec, West Coast Correspondent | May 2012, Vol. 239 No. 5

The Bakken shale play as of 2011. Image: EIA.

In the winter of 2012 a mostly snowless and relatively warm Bakken Shale play in northwest North Dakota was trucking about 70% of its oil supplies in the gathering and processing phase as production continued at an all-time record clip averaging 546,000 bpd in January. New midstream infrastructure construction was limited to intrastate shipments within an under-developed gathering and processing system.

In various ways this scenario is being repeated in many of the shale plays as production of oil, natural gas liquids and gas continues to outpace the development of midstream infrastructure. As a result, many of the exploration and production (E&P) operators are increasingly getting involved in takeaway infrastructure.

“I think there is a trend, although you will probably get different philosophies on the subject,” said David Lundberg, a New York City-based analyst with Standard & Poor’s Ratings Services (S&P). “It is particularly evident in certain shale plays where the infrastructure is not well built out, such as the Bakken.”

What has been unleashed is an unprecedented midstream infrastructure building boom that recent industry-funded studies have concluded provides the potential for tens of thousands of jobs and a $511 billion cumulative boost to the U.S. economy during the next two decades. The build-out is going to be needed to deliver domestic natural gas, liquids and crude oil in the burgeoning shale plays springing up around the nation.

“In the Bakken, a lot of companies have struggled with meeting production targets because of the lack of infrastructure,” Lundberg said. “Many companies have had to resort to a lot of unconventional means to get the oil out of there. And some have learned their lessons there and are now investing big time in plays like Eagle Ford.”

In order to head off or cut into existing bottlenecks, many E&Ps are what Lundberg called “pretty aggressively” building their own midstream infrastructure, attempting to keep their fate in their own hands. “They get greater clarity and confidence that they can meet their growth objectives,” he said.

A lot of companies also are finding that from a cost-of-capital standpoint it is very advantageous to own or partially own infrastructure through Master Limited Partnerships (MLP). Lundberg cited Chesapeake Energy Corp. and Anadarko Petroleum Corp. as examples of this. Here, the public market “places high value on pipelines,” he said. “And at the same time they can control the MLP.”

A study of shale’s economic impacts by the Interstate Natural Gas Association of America (INGAA) Foundation released earlier this year predicts significant near- and long-term benefits that will be spread to all regions of the United States. It concluded the gas, natural gas liquids (NGL) and crude supply-to-markets sector will average 125,000 jobs annually from now through 2035, providing nearly $57 billion in federal, state and local tax revenue during that period. (It was conducted by engineering/consultants Black & Veatch for INGAA Foundation, "Jobs & Economic Benefits of Midstream Infrastructure Development: U.S. Economic Impacts through 2035.")

“Last winter [2011] was quite hurtful to the industry; we had numerous large storm events that caused wells to be shut in, power lost, and road conditions preventing truck movement,” said Justin Kringstad, director of the North Dakota Pipeline Authority.