Surging oil and gas production in new areas across the United States creates fresh opportunities and challenges for companies operating a labyrinth of North American pipelines built decades before the current drilling boom. The country needs a “rationalizing of the pipeline grid” to reflect the new energy development, said David Devine, the new chairman of the Interstate Natural Gas Association of America and the president of central regional natural gas pipelines of Kinder Morgan. Pipeline companies will play “a vital role” providing “the critical infrastructure that’s needed to link these new gas resources to new consumption markets.”
The current pipeline network was constructed around former oil and gas hotbeds, with much of the grid flowing to the north and east. But oil drilling in North Dakota, natural gas production in the Northeast and the zeal for natural gas liquids on the Gulf Coast have dramatically changed the dynamic. “Location of shale gas production basins relative to consuming markets will continue to drive adaptations of the interstate pipeline grid,” Devine told reporters Wednesday. Companies increasingly will be “taking pipe in the ground that may no longer be highly utilized as designed and putting it into service in different, higher-valued purpose.” In some cases, companies are looking to reverse the flow of pipelines — for instance, to ship supplies away from Pennsylvania and Ohio, instead of to the states. As more gas production happens close to its consumers, some pipelines are flowing well below their capacity. “Marcellus production has changed things dramatically for a pipeline grid that was focused primarily on moving gas from south to north and west to east,” Devine said.
Companies also increasingly may seek to convert gas pipes to transport crude or natural gas liquids to fractionators and other facilities along the Gulf Coast. “We have seen some examples of that — I think we will see a lot more — where you might take an underutilized gas pipeline and you might repurpose it to oil or NGLs,” Devine said. Energy producers are eager for more pipeline capacity, in part to chip away at an oil bottleneck in the Midwest that has suppressed prices and to take advantage of natural gas liquids that can be made into everything from plastic bags to tires.
Dozens of such pipeline realignment and conversion projects are underway:
- Tallgrass Energy is converting the Pony Express gas pipeline — purchased from Kinder Morgan in 2012 — so it can transport Bakken formation oil to market. With the conversion and an additional 260-mile pipeline extension, Pony Express eventually will be able to send as much as 302,000 barrels of light sweet crude per day from North Dakota to the oil hub in Cushing, Okla.
- Enterprise Product Partners and Enbridge Inc. are expanding the Seaway Pipeline that connects Cushing and Freeport, Texas. The pipeline used to send oil north, but the two companies spent $300 million to reverse its flow and boost capacity, so as to capitalize on a bottleneck of crude in Cushing. so it will flow from Cushing to Houston. A new, parallel pipeline would further boost capacity.
- In April, Magellan Midstream Partners began shipping crude oil through its Longhorn pipeline, after reversing its flow. The pipeline had carried refined products from Houston to El Paso.
- Earlier this month, Pennant Midstream announced it planned to build a 38-mile pipeline to connect processing plants with natural gas liquids extracted from Ohio’s Utica Shale.
For midstream companies, a major challenge in realigning yesterday’s pipelines for today’s energy market is getting regulatory approval from federal and local officials. Environmentalists concerned about increasing U.S. reliance on natural gas and land owners worried about oil spills are playing a more active role challenging proposed pipeline projects. For instance, opposition to TransCanada Corp.’s proposed Keystone XL pipeline has been fed not only by concerns from landowners in its path, but also environmentalists worried it would expand the marketplace for oil sands crude harvested in Alberta through particularly energy-intensive methods. “We are seeing more involvement by parties that go beyond the locally affected landowners and environmental groups and others where there is a direct affect on their community to others who are driven by broader issues,” said Don Santa, the president of the Interstate Natural Gas Association of America. “It highlights the importance of the pipeline industry to do the job right, so we are not vulnerable to challenges.” The Federal Energy Regulatory Commission has a long history vetting pipeline projects, predating the surge in environmental activism around the infrastructure. Santa said the agency has a “well-developed capability and legal precedent . . . that continues to work to our benefit.” Devine was elected chairman of the trade group’s board of directors on Thursday. He will serve a one-year term until October 2014. Other newly elected board members include vice chairmen Ron Tanski, president of National Fuel Gas Co., and Jimmy Staton, CEO of Columbia Pipeline Group.