America's pipeline wars
Public opposition and shrinking growth opportunities have put the midstream in a tough spot. Expect more deal-making
The business of building pipelines and other energy infrastructure in America used to be fairly quiet. That was before Keystone XL. In scuppering the project, environmental groups stumbled onto their most effective strategy for keeping oil and gas in the ground-cutting off access to markets. Now, nearly every major pipeline project in the US is a battleground between the industry and activists looking to derail Big Oil.
The latest flare up came on the plains of North Dakota where a coalition of Native American and environmental groups halted work on the $3.8bn Energy Transfer Partners-backed Dakota Access Pipeline. The line would ship around 470,000 barrels a day of Bakken crude nearly 2,000km to refining infrastructure in Illinois, reducing the need to move volatile light crude by rail. Its opponents argue that Energy Transfer and government agencies didn't address the potential risks to waterways and tribal lands through which the pipeline passes. The Obama administration stepped into the debate and ordered an indefinite halt to the project, while a federal court hears arguments from both sides. The ruling looks likely to favour Energy Transfer, but the project now faces potentially months of delays.
The fight over the Dakota Access line is just the latest in a string of conflicts over new pipelines that serve as the backbone for the US shale industry. The opening of new shale plays over the past decade brought oil and gas development, and its infrastructure, to parts of the country that had never seen it before. That created a huge opportunity for midstream companies to link these previously undeveloped areas with established refining bases. Between 2013 and 2015 alone, the US added more than 32,000km of new pipelines, enough "to circle the world and then some", as president Obama put it.
It was a windfall for the midstream industry that spawned dozens of new master limited partnership (MLP) companies-a complex organisational structure that is exempt from paying corporate income tax because it passes most income to investors in regular dividend payments, but requires a constant inflow of funds to continue investing.
But the boom has also brought clashes-and the pipeline industry has struggled to navigate them. As well as environmentalists, landowners are pushing back against the use of eminent domain-which allows companies that have government approval to take private property for public projects-to lay down pipelines on their land. In Georgia earlier this year, Kinder Morgan suspended construction of its $1bn oil-product Palmetto Pipeline after a backlash from landowners along the route led the conservative and normally business-friendly Georgia legislature put a moratorium on the project.
Those fights are likely to shift to the Northeast over the next couple of years as a host of new pipeline projects move forward linking the Marcellus and Utica shale gasfields to homes and power stations across densely populated New England. Around 11 projects that would add 11bn cubic feet per day-equivalent to around 15% of total US consumption-are expected in the region, according to Bernstein Research. A strong environmental case can be made for these projects, as they'll largely replace dirtier coal-burning power generation and oil burnt for home heating. But the industry hasn't been effective in getting its message across, and it will be facing groups that have been gearing up for the fight.
Rising opposition to new pipeline construction isn't the only threat to growth. The oil industry downturn has taken about 1m b/d of production out of the US, with big declines seen in the Bakken and Eagle Ford shale areas. In September, for instance, Enbridge shelved its 800km, 250,000-b/d Sandpiper pipeline out of the Bakken because there wasn't enough oil to fill it. New gas projects in the Northeast and expanding development of the Permian in West Texas will provide some opportunities for pipeline builders-and the long-term outlook for US production seems relatively rosy-but for now the midstream finds itself in a difficult spot.
As new projects become more scarce so too will MLPs. This, along with the opposition to new pipelines, makes existing lines all the more valuable, and is fueling consolidation across the sector as companies look to bolster their backlog of projects. One megamerger in the sector fell apart earlier this year when Energy Transfer Equity pulled out of its deal to acquire Williams. Weak crude prices had undercut the deal's economics. But another more recent purchase that will see Enbridge take over Spectra Energy for $28bn is likely a sign of things to come.
This article is part of a report series on US energy. Next article: Gas rallies