The United States has a D grade in world infrastructure. This is a damning assessment for the biggest economy on earth. It has been no secret that our national infrastructure is falling apart at the seams – everything from bridges to our electric grid. Some of our electric grids have not been updated since the Eisenhower administration.
But the U.S. is facing another infrastructure problem in regards to energy. Canada and the United States have been suffering from oil backlogs and price decreases because there are not enough pipeline networks to transport crude on a timely basis. It is one of the reasons why the WTI benchmark has traditionally been behind in price compared to Brent crude, and it is a problem in the Alberta tar sands region of Canada as well.
Canadians are hoping Obama will approve the Keystone XL pipeline for some measure of relief, but the president may put his decision on an indefinite hold.
This will come as a blow to Canada, a nation that is not only counting on Keystone XL, but is also getting the short end of the stick as East Coast states like New York are demanding less Canadian gas. New York imported 892 billion cubic feet from Canada in 2007, but dropped this to 286 billion as recently as 2011. This can be attributed to production in the Utica Shale of the Midwest and the Marcellus on the East Coast – a play that is expected to make up 30 percent of the nation’s gas supply by 2020.
But glut issues are still a problem, and while gas consumers will get a good deal, the price drop only hurts producers.
It will be more of a challenge as pipeline construction is unable to keep up with production. This is why pipeline companies that have a special focus on gas-gathering and transportation are vital to the energy industry.
The best place to invest in this area will be in pipeline companies. They will be crucial in providing transportation services to energy producers, and it is a good operation to get into as national production increases. Pipeline companies are also an attractive option, since they tend to be small companies that pay little in corporate taxes, and they are not plagued with high capital costs.
But despite these deals, things are not moving fast enough.
Another alternative comes in the form of railway transportation, but there are several problems with this solution.
The railway industry has certainly gained as more energy companies need to rely on other forms of transportation.
With railway, however, also comes with the higher likelihood of accidental spills, which not only results in profit loss for companies, but is devastating to local towns and the environment.
Ever since the deadly oil train accident that took place in Quebec back in July – a tragedy that took the lives of 47 people – there have been questions raised about the safety of transporting oil through towns and sensitive areas around the country. There was also a recent oil train accident in Edmonton, Canada, during which over 100 people were forced to evacuate.
When it comes to rail versus pipelines, you are three times more likely to have accidents using trains.
Despite these high profile accidents, the railroad industry will continue to benefit from domestic energy, since companies are left with no other choice but to ship crude via train.
Shipping by train can also be cumbersome at times, since companies cannot fit as much volume in rail cars, and it can be a slow process in getting the oil to market.
But you know the old saying: “It’s better than nothing.” This is the attitude many in the energy industry are taking.
However, it should not be something the industry has to settle with.
Local and national mandates are needed to construct more energy pipelines that will connect major hubs in North Dakota and Texas to major refinery centers like the Gulf Coast.
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Alaska is looking to revive its old oil fields through lucrative tax deals and infrastructure projects. Major companies like BP (NYSE: BP), ConocoPhillips (NYSE: COP), and Exxon Mobil (NYSE: XOM) have eyes set on the town of Nikiski, where a natural gas pipeline will be built for natural gas liquefaction to compete in Asian markets.
Alaskans are also hoping that an old LNG plant that was closed in 2011 will be reopened. An additional plant may also be constructed that is more than ten times the size of the original plant. This 800 mile pipeline will be strategically placed from the North Slope to South-Central Alaska. The North Slope was once Alaska’s prized treasure during its oil heyday, and the state legislature is hoping that energy companies can revive the old field.
Nothing is set in stone, but energy companies believe Alaska would be the best place to send LNG to Asian markets.
One deal that seems to be in the green is the acquisition by Regency Energy Partners (NYSE: RGP) of PVR Partners LP (NYSE: PVR) for $3.8 billion. And Crestwood Midstream (NYSE: CEQP) is buying Arrow Midstream Holdings for $750 million. Arrow has 460 miles of pipeline in the Bakken of North Dakota – transporting 50,000 barrels of oil and 15 million cubic feet of natural gas a day.
After Midstream buys Arrow, the company will control 18 percent of crude output, making it one of the largest transporters of crude in the shale energy world.
Regency is owned by billionaire Kelcy Warren – an investor who has lucrative holdings in the Eagle Ford, the Permian Basin, and northern Louisiana.
Despite the gluts and slowdowns, production is still going strong. And because there are more pipeline in the works, WTI has been catching up with Brent Crude on the world market.
But if these slowdowns continue, we could see a worst-case scenario where WTI drop further if there are not enough pipelines to keep up with ever-growing production. Texas has already reached over two million barrels a day, and North Dakota is set to reach the one million mark.
If we want to take ourselves seriously as an energy-producing nation, there must be the necessary infrastructure to match growing capacity.
So let’s get to work, America.