July 2019, Vol. 246, No. 7


Is North America Facing a Pipeline Bubble?

By Nicholas Newman, Contributing Editor

With about a million active wells in the U.S. pumping more and more shale oil and gas, the fracking revolution of the last decade has spawned a boom in pipeline construction, initially to carry oil and gas to markets and regional hubs across America and more recently to export facilities.

Anticipation of burgeoning supplies in North America underpins an additional 110,000 miles (180,000 km) of current construction and proposals at a cost of $232.5 billion between 2017-2035. Whether this huge planned build in pipelines, to support a new industry with an uncertain lifespan, really makes economic sense is open to debate. 

“It’s hard to predict how long a fracked well will be productive, but a pipeline is built to last up to 50 years,” said Ted Nace, executive director of Global Energy Monitor, a network of fossil fuel industry trackers. 

Pipeline Developments 

In the South, there are at least 12 pipelines under construction and 26 in pre-construction development in Texas, accounting for about 10,000 miles (16,000 km) of pipe, designed primarily to overcome congestion capacity problems between the gushing Permian and refiners on the Gulf Coast.

This while burgeoning supplies of gas await completion of take-off pipes connecting to LNG export plants on the Gulf Coast and transit pipes destined to bring gas south to Mexico.

In the Central Mid East region, which includes the Marcellus and Utica shale formations in Pennsylvania, Ohio and West Virginia, pipelines are transporting crude oil to refineries and terminals located on the Atlantic Coast and Great Lakes. In addition, some pipelines are being developed to transport liquid natural gas by-products to new ethane cracker facilities located along the Ohio River.

In the North, pipeline capacity improvements are being made to carry Canada’s Alberta tar sands oil southwest toward the Pacific Coast and southeast toward the Gulf Coast. Already under construction are pipelines to carry Albertan and British Columbian gas to new LNG port of on Canada’s Pacific Coast. In addition, other pipeline proposals are awaiting approval from government and local communities.

With gas having overtaken coal in the power segment, along with burgeoning supplies of oil, producers need new pipelines to carry the growing surplus to the coast for export to markets in Asia, Europe and Mexico. In this scenario, oil and gas producers, pipeline investors and operators are confident North America can rely on growing demand from Asian markets in the coming years. 

Unfortunately, according to the non-governmental organization Global Energy Monitor, this may not be the case. In the report, Pipeline Bubble, the organization warms of the danger of over-expansion and even envisages a contraction of pipeline construction plans, citing the experience of coal which in just the last decade has seen a sharp unanticipated contraction in demand. 

“The idea is you will pick up natural gas and oil in America, ship it across the sea and they will (in Asia) be using that in their power plants instead of their own coal and instead of their renewables … is a little questionable. Those economics are changing quickly,” Nace said.

Coal’s global decline owes much to the adoption of wind and solar power and investment in energy saving and efficiency measures. In coming years, implementation of low carbon policies, the adoption of tougher emission standards, as well as the projected large price decline of renewables, threaten to reduce the market share of coal from 27% in 2017 to 25% in 2023, despite global growth in electricity generation. 

“The energy landscape is shifting radically, and today’s pipelines will likely be rendered obsolete long before their 40- to 50-year lifespan,” Nace said.

Threats to Prospects

The long-term prospects of America’s pipeline business could be undermined, sooner rather than later, by the now accelerating and urgent recognition of the requirement to transition the world away from fossil fuels towards sustainability and low-carbon economies. 

Although Asian demand for oil and gas is likely to continue to increase in the coming years, peak demand may be reached earlier than current forecasts. Public concern over air pollution, particularly in Asia and India, could hasten the electrification of transport in China, India and Japan.

Tougher environmental legislation in Europe and the IMO’s 2020 target could inaugurate a shift toward cleaner LNG, hydrogen cells and even sails to propel ships. And in the coming years, when 3-D printing becomes mainstream, goods can be manufactured closer to customers, thus cutting the truck, rail and ship journeys even further. 

Meanwhile, the campaign to curb the use of plastics could reduce requirements from the petrochemical sector. Developments such as these could put a brake on the growth of demand for oil and gas worldwide. 

At home, despite Washington’s lack of support for the Paris Accords, ongoing state and industry pressure is leading to a slowdown in growth in demand for oil and gas, reports the EIA. Gas is facing increased competition from domestic wind and solar which will be boosted by improvements in energy storage and simultaneously reduce demand for gas peaking plants.

Electric vehicles will become mandatory in many states, and the upcoming war on plastics will curb demand for oil. These developments alone could discourage the opening of new sources of domestic supply and planned pipelines. 

Geopolitics and market factors will also affect demand for U.S. energy exports. For example, the current trade war between the U.S. and China is encouraging Chinese gas buyers to look to Central Asia and Russia as alternatives for U.S. LNG gas. 

Longer term, U.S. gas exporters are also likely to be challenged by existing and new gas producers in world markets. For instance, new gas fields coming on line in the next decade, such as Qatar’s North Dome Field and Iran’s South Pars field, will boost Middle East natural gas output by 65%. 

Much of this can be easily and competitively piped to major markets in Europe, India and China, according to IEA. Similarly, China’s own domestic production of natural gas is set for a jump of 142% by 2040, due to the use of shale gas drilling in the Sichuan Basin. Furthermore, according to IEA forecasts, Africa’s natural gas production could rise by over 130%, based on gas discoveries in 14 sub-Saharan countries and partially financed to the $175 billion by a U.S. government program. 

In Latin America, new supplies from Brazil’s offshore pre-salt fields and Argentina’s onshore Vaca Muerta shale fields will increase gas supply for domestic markets and export. In sum, global natural gas output is expected to increase by 46%, against the U.S. output increase of just 36% by 2040.

Therefore, if U.S. shale output should continue to increase through to the 2030s, pipeline constructors and investors could find themselves squeezed in a pincer movement by constrained demand for oil and gas at home and abroad and by strong competition as new output is developed worldwide, often at a price cheaper and closer to intended markets. 

In this scenario, should the proposed pipelines be built, they are likely to outlive the fracking industry and, at best, operate at under capacity.  P&GJ

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