North Dakota Pipeline Investing

Brian Hicks

Written By Brian Hicks

Posted July 30, 2013

Picture yourself the CEO of a company that ships wholesale products by way of sea. You take a look at the quarterly assessment for inventory and revenue, noticing that income has declined over 50% from the last quarter despite a surplus of popular merchandise.

You begin to wonder what’s happening… until you read on that those at the management level have decided to dump excess products into the ocean because there is not enough warehouse space to house all company goods.

You read that over $100 million in products is being discarded into the ocean each month.

natural gas flaringAny logical CEO would pinpoint all individuals associated with this maddening scheme and purge them from the company with pink slips in tow.

But that is what’s happening every month in the Bakken of North Dakota with the flaring of natural gas. $100 million in natural gas is being flared into the sky… each month.

Over 266,000 million cubic feet of natural gas is flared daily, the equivalent of $3.6 million each day, a report from Ceres has shown.

In May of this year, roughly one-third of all natural gas was flared.

In any other situation, any company embarking on this strategy would likely have been out of business long ago. But thanks to record oil production, energy companies can afford to burn money and precious resources.

But this doesn’t mean it is sustainable.

At a time when many utility companies are struggling to stay afloat, it seems insane to casually waste natural gas.

And energy companies still have to pay taxes and royalties for all associated gas burnt into the atmosphere!

The United States is one of the top 10 flaring nations in the world – so much so that the Bakken of North Dakota illuminates on the same level as major U.S. cities from the viewpoint of a NASA satellite.

The burning of flare gas is so prevalent in North Dakota, the Daily Mail reports it could currently provide enough energy to power homes in Washington D.C. and Chicago combined!

This is an area the energy industry and environmentalists can agree on: the flaring of all this natural gas is untenable.

While environmentalists may be concerned about the environment, I know you see dollars wasted every month like I do.

If you talk to shareholders, owners, and those concerned about the environment, all will concur that this is a major problem.

Now, I know producers cannot save every cubic foot of natural gas, but harnessing most of it will be a safe investment later down the road.

But the sad fact is that many energy drillers do not see much value in natural gas, since prices are too low to keep up with production costs. They would rather burn the commodity than spend time and resources housing it.

Those who think that way are not looking far enough into the future.

I don’t care how low natural gas prices are on a domestic level; it is still a precious commodity worldwide, and it is an extra source of revenue being lost every day.

Natural gas prices are currently low, but let’s keep in mind the fluctuating nature of energy markets and international markets in general that affect energy prices. Natural gas prices will one day return to profitable levels, and producers that chose to capture large amounts of natural gas will be grateful to have harnessed and stored it.

And natural gas has even greater value in the form of liquefied natural gas.

Now, we know about the delayed approval of LNG exporting facilities from the Department of Energy.

Government officials and talking heads on television are concerned about the high levels of natural gas that could be exported from the country, but rarely do they talk about the massive amounts of gas currently being burned away in North Dakota.

The approval of more LNG facilities is vital now more than ever in the energy field, but we know of the powers that be – in the forms of Dow Chemical (NYSE: DOW) and other manufacturers – are lobbying for the continued depression of natural gas prices.

Cheniere Energy (NYSE: LNG) recently fostered an agreement with Britain for LNG imports. Japan, South Korea, and India are just a few major nations in Asia that crave LNG from abroad.

Russia is considering liberalizing its energy market so a greater number of oil and gas companies can export to Asia.

America’s energy policy is simply not jiving with the energy market and the ground situation when it comes to oil and gas production.

We need large-scale national pipeline projects.

There are even some existing pipelines that are too narrow to accommodate the massive amounts of natural gas being produced.

We need localized infrastructure and a national pipeline project for natural gas on par with Keystone XL. Canada has the Northern Gateway pipeline in the works, and though it is being stalled by indigenous rights and politics, at least the Canadian government has a national plan for energy infrastructure.

In the U.S., Keystone XL is the only major national project being considered, and even that is seeing continued delays as the government drags its feet. But even when that is approved, we will still need larger gathering systems and a strictly national pipeline to satisfy domestic energy demands.

I know all of this is easier said than done, but it is a necessary feat if the U.S. is going to become a serious contender in the international energy market.

Every day we’re seeing WTI crude prices catching up to Brent on the world stage, and it is because of greater localized infrastructure for crude transportation. The same type of pipeline mandate needs to take place for natural gas.

Pipeline Portfolio

If you want to add a new angle to your energy portfolio, consider midstream pipelines for natural gas.

In all honesty, the answer is simple.

If there were more pipelines in the area, energy companies would take advantage of them in a heartbeat.

It is actually more important for natural gas to have its own specialized network, since crude can just as easily be transported by rail. Natural gas simply does not have that option.

There is widening demand for these pipelines – not just for natural gas itself, but for natural gas liquids. It is a good sector to be in, as both energy and midstream companies are trying to interconnect North Dakota’s wells through pipelines networks.

You hear about small, local pipelines being built along the Gulf Coast and East Coast, but Bakken territory is THE hub for future infrastructure growth.

ONEOK Partners L.P. (NYSE: OKS) completed two separate infrastructure projects in North Dakota in 2013 – one for NGLs and the other a natural gas gathering facility.

Enbridge’s (NYSE: ENB) presence in the Bakken has been slightly controversial due to the company’s complaints of hydrogen sulfide in the Bakken area, but the Canadian company has made contributions to oil and natural gas gathering infrastructure in North Dakota. Through alliances with Veresen (TSE: VSN) and Hess Corporation (NYSE: HES), Enbridge has been a powerful force in the Bakken.

Another recent natural gas pipeline contributor in North Dakota is WBI Energy, a subsidiary of MDU Resources Group (NYSE: MDU).

As you can see, the demand and slow growth is there, but the midstream sector out west still needs a boost to address the problem of flare gas waste.


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