In 2006, when I started following the MLP space, the lurking industry fear was about peak oil. Then the combination of horizontal drilling and hydraulic fracturing led to booming shale production, which eventually created an oversupply so dra- matic that production is now falling.
We have returned—in a way—to an infrastructure outlook reminiscent of peak oil, although supply is now constrained due to pricing, not availability. Existing pipelines still carry hydrocar- bon-based energy, but unless we see a material improvement in pricing, the demand for new infrastructure will be limited to shifts in demand areas due to urbanization or shifts in geographic loca- tions of energy-intensive industries.
As an example of continued-although-muted, supply-based infrastructure demand, Saddlehorn and Grand Mesa decided to combine pipeline projects that individually would providetakeaway capacity from the Denver-Julesburg Basin to theCushing, Okla., crude trading hub. The expected production now only supports one pipeline instead of two. As a combined project, construction costs are decreased on both sides, pipeline capacity aligns with revised production expectations (reducing overbuilding concerns) and future expansion is still possible.
Those MLPs that serve the demand needs of North America have growth prospects despite the unit price contagion from falling oil prices. Examining the multiyear Transco pipeline expansion (owned by The Williams Cos. Inc. family of companies) reveals 13 sep- arate expansion projects, most of which serve the demand-pull need of electricity generation for residential heating. Only two of these projects—Appalachian Connector and Gulf Trace—serve the supply-push side.
Just like the Transco system, few MLPs are entirely on the demand-pull or supply-push side of the midstream business.
In 2005, energy demand in the U.S. had grown by roughly 1% per year since the petroleum shortages in the 1970s. Today, the U.S. Energy Information Adminis- tration predicts that total energy use over the next 25 years will grow by around 7%, or only 0.3% annually. Residential energy consumption is expected to remain flat over the period as en- ergy efficiency standards offset population growth. (We plug in more devices than ever before, but energy-efficient appliances are also now commonplace.) Commercial and industrial en- ergy demand will grow modestly, while domestic transportation demand will fall.
While there has been a two-thirds reduction in expectations for energy demand growth, it’s also important to look at the changing composition of our energy consumption and who stands to bene- fit. Natural gas now accounts for the largest share of U.S. electricity generation and is expected to continue to take market share from coal in the coming decades—a positive for MLPs operating natural gas infrastructure assets.
Change is constant in the energy industry, but MLPs will always have a foundation in the demand for transportable energy.
Maria Halmo is the director of research at Alerian, an independent provider of MLP and energy infrastructure market intelligence. Over $13 billion is directly tied to the Alerian Index Series. For additional commentary and research, visit www.alerian.com/alerian-insights.
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