Oil Pipeline Supply Shortage

Brian Hicks

Written By Brian Hicks

Posted July 31, 2012

As you already know, we’re breaking past a new frontier in the oil and natural gas business. And the name of the game is shale oil.

The shale revolution is well underway, and results so far, fracking controversy notwithstanding, have been more than promising. But the industry may face some difficulties soon due to an anticipated shortfall of certain essential components.

10-ton valves and huge pipeline pumps are required in order to allow markets to adjust to the sudden upsurge in oil and gas production. Although major companies like Shell (NYSE: RDS.A) and Enterprise Products Partners (NYSE: EPD) have undertaken major expansion and development work on more than 20 big pipelines, some parts of the infrastructure haven’t kept up.

Reuters reports:

“The supply chain hasn’t quite caught up,” said Terry McGill, president of Enbridge Energy Co Inc, the U.S. division of Canadian pipeline giant Enbridge Inc, which has some $4 billion worth of U.S. projects on the books.

A shortfall of these valves and pumps is looming, and companies are worried about what lies ahead.

As yet there aren’t any problems, but the scale of the future scenario is daunting. So far, and for a very long time, pipelines have mainly worked to supply inland refineries with U.S. offshore or Middle East crude.

Now, they have to reverse the pipeline direction and allow for the enormous production emerging from Canadian shale fields and U.S. shale reserves.

Already, expected costs have been discarded as real costs surge far beyond. It is the major projects—the ones pumping in excess of one million barrels per day—which can face real delays. For example, TransCanada’s (TSE: TRP) proposed $7.6 billion Keystone XL pipeline requires entirely custom-made valves. And that pipeline will need a great many of those valves.

The market has responded with several acquisitions by large companies of smaller parts suppliers in an effort to consolidate the supply chain.

The downside could be higher prices for parts in response to skyrocketing demand. Back in 2007 and 2008, when the shale boom necessitated an increase in pipelines, prices already spiked higher.

The valves in question cost around $120,000 each and take 20 to 22 weeks to build. Major pressure pumps can take as long as a year to become ready for installation. Pipelines requiring different measurements at different locations complicate the matter.

Although there is a surge toward market consolidation of the supply chain, critics are complaining that a diversification of suppliers is called for instead.

This comes in response to the long and increasing lead times being requested by manufacturers. Raw material for this stuff is, of course, plentiful, as steel is the major requirement.

At this point it is a waiting game between oil and gas operators, pipeline operators, parts manufacturers, and the general market to try and achieve some equilibrium.

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