Pipeline Issues
Posted: Mon Oct 24, 2016 1:44 pm
Raymond James Energy Industry Brief dated October 24, 2016: "Could Pipeline Regulatory/Env. "Issues" Derail our U.S. Oil & Gas Production Outlook?"
I skip the first three pages and go right to their conclusion:
Conclusion: Do we have enough pipe capacity for huge production growth in 2017-18 and beyond? We remain optimistic, but
incremental pipeline investment is needed later this decade. Let’s start with gas. Environmental groups appear to be pleased with
recent developments, but consumers are missing out on attractive, cost-saving supply. For example, Spectra estimates that Access
Northeast would have saved New England natural gas consumers ~$1 billion annually – and this is just one example. Frankly, we
can’t know for sure how it will play out given the multitude of different issues delaying or causing the cancellation of midstream
projects today. If it were one consistent hang-up – issues with the FERC, for example – then the situation would be clearer. However,
FERC regulation is not typically the most difficult issue to navigate, and in many cases, the lack of “public convenience and necessity”
isn’t to blame on natural gas projects (and we see a similar trend on the crude oil side of the discussion). Given this context, we
don’t feel that the problem set slowing the current slate of projects is a sustainable problem, but instead more of a collection of oneoff
issues. As such, we’re hoping for pragmatism and think that “market need” and straightforward economics will eventually win
out. To that point, one work-around given all the issues in New England is to focus growth potential around projects that can utilize
existing ROWs. Although this strategy is not 100% infallible considering the issues Access Northeast, NED, and even DAPL (which, in
fact, follows the ROWs for an existing gas pipeline) have run into this year. The Northeast natural gas pipeline situation is both an
incredibly important AND complicated topic – we hope to address it in more detail via future Stat of the Week reports in the
near/intermediate term. In sum, there are still plenty of projects coming to help narrow differentials to Henry Hub, but each project
delay keeps us closer to the status quo (and is a medium-term positive for Henry Hub). We continue to view projects moving natural
gas from the western Marcellus/Utica to the Midwest, Gulf Coast, mid-Atlantic and southeast as favorable, lower-barrier initiatives.
While we anticipate gas pipeline projects out of the Northeast facing somewhat formidable opposition and the Marcellus/Utica
remaining constrained for the mid-term, oil basins should be less problematic, in our view (at least near-term). Across the major
shale basins that emerged over the last several years, the only two for which we foresee potential takeaway constraints arising are
the Permian, and possibly the Bakken (albeit to a lesser extent). In the Permian (considered by many to be the most prolific basin),
the only planned pipe coming online before 2020 is EPD’s Midland-to-Sealy, which adds ~300 Mbpd of takeaway capacity. As shown
in the below right chart, our production assumption could lead to moderate constraints (local demand combined with takeaway
capacity is likely still sufficient) if this pipe faces issues. However (as we covered earlier), oil lines fall under the purview of state
regulatory bodies (the Texas Rail Commission in this case). Given Texas’s history as a very hospitable environment for energy
projects, we do not anticipate serious issues arising as Permian takeaway capacity is added or needed. The Bakken has a low risk
that DAPL is canceled, in our view, and we still believe it will get completed. The lower left chart shows that if DAPL is completed, the
Bakken could face limited constraints, even with our strong production growth assumptions (almost ~200 Mbpd of growth from current
levels to 2018). Outside of these two basins, we view the DJ/Niobrara, SCOOP/STACK, and the Eagle Ford as “sufficiently piped.” In
regards to the Eagle Ford, we also note that even under more aggressive production estimates, sufficient pipeline capacity appears
to be in place, though the basin exists close enough to significant demand centers that trucking crude always remains an option.
Bigger picture, asset footprints in key areas for both supply and demand are almost literally irreplaceable, and continue to increase
in value as new infrastructure becomes more difficult to construct in today’s environment (i.e., scarcity value argument). Case in
point, the U.S. Northeast has been a major source of M&A over the past 12-18 months as larger-scale entities secure their Northeast
footprint. Only time will tell, but there is certainly value in strong, existing energy infrastructure assets – especially in the Northeast
for natural gas and the Permian and SCOOP/STACK for both oil and gas supplies. We will also continue to emphasize demand-pull
growth initiatives, keying on regions like the Gulf Coast and other major North American population centers, as incremental
infrastructure build-out in these areas will place the U.S. in a better position to work towards supply/demand equilibrium, with price
serving as the rationalizing mechanism.
I skip the first three pages and go right to their conclusion:
Conclusion: Do we have enough pipe capacity for huge production growth in 2017-18 and beyond? We remain optimistic, but
incremental pipeline investment is needed later this decade. Let’s start with gas. Environmental groups appear to be pleased with
recent developments, but consumers are missing out on attractive, cost-saving supply. For example, Spectra estimates that Access
Northeast would have saved New England natural gas consumers ~$1 billion annually – and this is just one example. Frankly, we
can’t know for sure how it will play out given the multitude of different issues delaying or causing the cancellation of midstream
projects today. If it were one consistent hang-up – issues with the FERC, for example – then the situation would be clearer. However,
FERC regulation is not typically the most difficult issue to navigate, and in many cases, the lack of “public convenience and necessity”
isn’t to blame on natural gas projects (and we see a similar trend on the crude oil side of the discussion). Given this context, we
don’t feel that the problem set slowing the current slate of projects is a sustainable problem, but instead more of a collection of oneoff
issues. As such, we’re hoping for pragmatism and think that “market need” and straightforward economics will eventually win
out. To that point, one work-around given all the issues in New England is to focus growth potential around projects that can utilize
existing ROWs. Although this strategy is not 100% infallible considering the issues Access Northeast, NED, and even DAPL (which, in
fact, follows the ROWs for an existing gas pipeline) have run into this year. The Northeast natural gas pipeline situation is both an
incredibly important AND complicated topic – we hope to address it in more detail via future Stat of the Week reports in the
near/intermediate term. In sum, there are still plenty of projects coming to help narrow differentials to Henry Hub, but each project
delay keeps us closer to the status quo (and is a medium-term positive for Henry Hub). We continue to view projects moving natural
gas from the western Marcellus/Utica to the Midwest, Gulf Coast, mid-Atlantic and southeast as favorable, lower-barrier initiatives.
While we anticipate gas pipeline projects out of the Northeast facing somewhat formidable opposition and the Marcellus/Utica
remaining constrained for the mid-term, oil basins should be less problematic, in our view (at least near-term). Across the major
shale basins that emerged over the last several years, the only two for which we foresee potential takeaway constraints arising are
the Permian, and possibly the Bakken (albeit to a lesser extent). In the Permian (considered by many to be the most prolific basin),
the only planned pipe coming online before 2020 is EPD’s Midland-to-Sealy, which adds ~300 Mbpd of takeaway capacity. As shown
in the below right chart, our production assumption could lead to moderate constraints (local demand combined with takeaway
capacity is likely still sufficient) if this pipe faces issues. However (as we covered earlier), oil lines fall under the purview of state
regulatory bodies (the Texas Rail Commission in this case). Given Texas’s history as a very hospitable environment for energy
projects, we do not anticipate serious issues arising as Permian takeaway capacity is added or needed. The Bakken has a low risk
that DAPL is canceled, in our view, and we still believe it will get completed. The lower left chart shows that if DAPL is completed, the
Bakken could face limited constraints, even with our strong production growth assumptions (almost ~200 Mbpd of growth from current
levels to 2018). Outside of these two basins, we view the DJ/Niobrara, SCOOP/STACK, and the Eagle Ford as “sufficiently piped.” In
regards to the Eagle Ford, we also note that even under more aggressive production estimates, sufficient pipeline capacity appears
to be in place, though the basin exists close enough to significant demand centers that trucking crude always remains an option.
Bigger picture, asset footprints in key areas for both supply and demand are almost literally irreplaceable, and continue to increase
in value as new infrastructure becomes more difficult to construct in today’s environment (i.e., scarcity value argument). Case in
point, the U.S. Northeast has been a major source of M&A over the past 12-18 months as larger-scale entities secure their Northeast
footprint. Only time will tell, but there is certainly value in strong, existing energy infrastructure assets – especially in the Northeast
for natural gas and the Permian and SCOOP/STACK for both oil and gas supplies. We will also continue to emphasize demand-pull
growth initiatives, keying on regions like the Gulf Coast and other major North American population centers, as incremental
infrastructure build-out in these areas will place the U.S. in a better position to work towards supply/demand equilibrium, with price
serving as the rationalizing mechanism.