A 795,000 Mile Long Pipeline to Big Energy Profits

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At the request of a major player in oil and gas pipelines, I was given a major task.

I had to estimate how much of the U.S gas and oil infrastructure needs to be replaced by 2025.

Then I needed to estimate the extent of additional connectors that would be needed to handle new domestic hydrocarbon developments.

And you thought Super Bowl Sunday was a lot of pressure.

I have done these estimates before… but something different popped up this time around.

Each time I crunched the figures, a new record amount emerged. Now while my client is in the tubular business, the sector that provides the metal needed to construct pipelines. His interest was straightforward enough – what volume is his company likely to see in the next 12 years?

Well, there are two dynamics here.

First, nearly 70% of the existing pipelines in the U.S. are more than 35 years old.

That means they will need to be replaced, and the replacement will accelerate as we proceed through the current decade.

But, it’s the second issue that could lead to huge profits…

As the domestic production base moves into the extraction of unconventional gas (shale, coal med methane, tight) and oil (shale, tight, and heavy), the industry will place greater emphasis on developing new basins. Each of these will require a full range of infrastructure investments.

And basic to all of this will be significant new networks of gathering, feeder, and trunk transit pipelines.

With the exception of gas condensate (the liquid state of between normal gaseous gas and crude), which can be moved in pipelines along with oil, these hydrocarbons have to be transported separately.

The pipelines can use the same route and be built parallel to each other, but they must still be completely separate lines.

When last I wrestled with this problem (about 18 months ago), I estimated that we should expect the combination of replacement and new pipelines to require 400,000 miles of gas and 285,000 miles of oil lines.

This time around, I am finding the totals are closer to 475,000 of gas and 320,000 of oil pipelines.

And that is without the Keystone XL, the contentious cross-border heavy oil line from Canada. I personally believe the Keystone will be built, with the U.S. State Department approving the new route later this year.

But given its controversial nature, I deleted it from consideration.

Combining gas and oil lines – an acceptable approach for determining statistics but something very dangerous in actual practice – I estimate 795,000 miles of pipeline work, or a 16% add-on in only 18 months since I last wrestled with this problem.

There is every reason to believe a further increase would be in the cards should I do this again midway through 2015 (or, in other words, after another 18 months).

These new pipeline needs will take place even with the increasing interest in other alternative and renewable sources of energy. The overall need for energy will be increasing, and that does provide the prospect for an expanding energy balance raising very different boats.

In such a scenario, the balance demanded will experience more types of energy contributing than in the past. But the center will remain today’s dominant sources, at least through 2025. Despite more selection in the market, as energy usage expands, oil and gas will be the main beneficiaries.

That sets up a new emphasis on the companies building the pipelines and the holdings that will control both the resulting network of transit outlets and the support services they require.

The former category includes engineering, design and construction. The latter is progressively coming under the control of limited partnerships, those holdings that began with ownership of oil and gas pipelines but has now moved into all other aspects in midstream applications.

Both of these are going to be providing some interesting opportunities for individual investors. Because, while the operating companies will be determining how much comes out of the ground, they are no longer builders or owners of pipelines, nor are they controlling the support structure necessary to move volume to market.

These are now the assets of a new class of energy holding, while specialty companies have taken over the construction of pipelines and related facilities. As the accelerated need for pipeline replacement and new expansions kick in, there will be profits for these companies.

And we plan to make some nice returns right along with them.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. bruce | February 6, 2013

    Nice article, but you did not mention any of the companies, like ETP or EPD that actually provide the pipelines or move the products. What good is investment advice, if you do not give specifics ? ??

  2. Jeff Pluim | February 6, 2013

    You don't say if your study was just for continental USA or if it includes Canada. I think that most pipeline related companies do business in both Canada and the U.S. And if you did include Canada, did you take into consideration that politicians in Canada, disgusted with Americans over the Keystone XL project delay or total shelving, are planning to move Alberta bitumin to the East coast of Canada via new and existing pipelines? And what about the Northern Gateway pipeline from Edmonton to Kitimat? Did you take that into consideration? And if you did, are you expecting that pipeline to be approved by British Columbian politicians?
    It seems to me that if you are going to do a job for your client, who I am guessing is probably doing business on both sides of the Canada/U.S. border, you should also be giving details on these projects, not to mention all of the old pipeline that must be replaced in Canada. And then maybe you can also give a more complete assessment to the readers here at Money Morning.

  3. Henry Bradley | February 6, 2013

    Yes, it is very clear that the Oil & Gas infrastructure is getting old and
    additional pipeline and processing facilities will be needed. Probably
    will need considerable drill pipe, casing, and tubing as well for the
    many wells to be drilled using new techniques. It would be most
    helpful to share with us the names of the leading providers of the
    piping and the leading infrastructure installers.

  4. alex | February 6, 2013

    OK, picks and shovels. Great investment idea. But who made them ?

  5. Richard Soley | February 11, 2013

    Dr. Moors, you have often mentioned you consult with governments on Oil and Gas, could you explain the most over examined, over regulated, over burden process by which the keystone Pipeline has been forced to undergo simply to move oil from Alberta to Texas, a process that has been ongoing for decades? Are we facing another round of American isolationism that all to often appears when American finds itself under pressure?

    Thanks

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