New gas, oil reserves a boon for pipeline construction

OTTAWA AND CALGARY — The Globe and Mail

Spectra Energy Corp. is driving North America’s pipeline construction boom into the heart of New York City, part of a massive industry push to connect previously untapped shale gas and oil reserves to under-served markets.

From the growing Alberta oil sands to booming production in Pennsylvania’s Marcellus shale gas reserves, new fuel sources are prompting pipeline companies to refashion the continent’s energy arteries.

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Houston-based Spectra Energy Corp., for example, is spending $800-million (U.S.) to lay a mere 24-kilometres of natural gas pipeline into Jersey City and Manhattan. Spectra’s pipeline extension is a key part of energy strategies embraced by the State of New Jersey and New York Mayor Michael Bloomberg to switch from heating oil to cheaper, cleaner-burning gas.

Spectra chief executive officer Greg Ebel said the pipeline project – so costly because it traverses such a densely developed area – could save consumers in the New York City area more than $250-million a year on their energy bills.

It’s just one example of the vast opportunity for North American pipeline companies as producers use modern extraction techniques to boost production of shale gas and tight oil structures.

“I think we’re just at the early stages of really understanding just how powerful a resource this can be in the United States and in Canada,” Mr. Ebel said in an interview. Spectra – which owns Ontario’s Union Gas local distributor as well as pipelines and processing plants in western Canada – has a $5-billion capital expenditure program planned for the next five years.

“You have to keep this [pipeline]build-up going because you are changing the plumbing that supports the house.”

The shale gale – as it has been called – this week prompted one of the largest corporate merger proposals of the year, as Kinder Morgan Inc. plans to spend $21-billion to acquire Texas-based competitor El Paso Corp.

By purchasing El Paso, Kinder gets a complementary network of gas pipeline into major markets like the U.S southeast. El Paso has the largest pipeline network out of the Marcellus, which is the “largest single growth basin that we would foresee,” said Ed Kelly, Houston-based director of natural gas for Wood Mackenzie consultancy.

But it’s not just expanding shale gas production that presents opportunity for the pipeline companies.

In the U.S., producers are developing oil and natural gas liquids plays in North Dakota, Colorado, Texas and Pennsylvania that will require new networks of pipelines. In Canada, expansion in the oil sands is driving pipeline projects to the U.S. and to British Columbia’s west coast, while shale gas development in B.C. is prompting infrastructure investment there.

A recent study by the Interstate Natural Gas Association of America Foundation forecasts capital expenditures of $130-billion over the next decade on natural gas infrastructure – including pipeline, processing plants and gathering systems – liquids pipelines.

And that’s on top of the $50-billion spent in the past decade just on the natural gas transportation system alone.

The spending is creating thousands of direct construction jobs, and spurring employment in supplier industries, notably the struggling steel sector.

A major driver of new activity has been the rise of so-called “natural gas liquids,” the propane, ethane and butane that are produced with natural gas in some areas. Those liquids are priced three to four times higher per BTU than natural gas, leading to an industry-wide scramble to produce them. Between July, 2010 and July, 2011 alone, U.S. gas liquids production rose 10 per cent.

The rapid increase in their production has led to a flurry of pipeline proposals: Lone Star and Sand Hills from west Texas to the Gulf Coast; Texas Express from north-west Texas to near Houston; Sterling III from northern Oklahoma to Mount Belvieu, on the Texas coast; Bakken from Montana to northern Colorado.

A rising tide of export ambitions are also driving expansion, with new pipes being planned to bring oil and gas to places like Kitimat, B.C. Efforts to carry more western crude to eastern Canadian markets are prompting further work to expand existing cross-continent pipeline systems.

Bentek Energy, a market analytics company, is forecasting “a huge increase in infrastructure” in coming years, said Adam Bedard, a senior director. “In natural gas liquids and crude markets, it’s certainly a boom.”

The nature of new plays also works in the favour of pipeline builders. Carrying oil sands crude, for example, often requires installing double pipes – one to carry thinned bitumen to market, another to bring the thinner back to north-eastern Alberta.

Given those factors, the medium-term picture looks rosy to those who physically install pipelines in the ground. Kevin Waschuk, a vice-president at Waschuk Pipe Line Construction Ltd., a Red Deer-based company that has built parts of Canada’s biggest recent pipe projects, expects a reprise of the busy times of 2006 through 2008.

But industry officials warn that regulatory delays and environmental opposition could undercut the pipeline expansion plans, and are urging governments to streamline the approvals process to ensure that projects are unduly delayed.

In Canada, “companies like Spectra will be watching the federal government – now that the prime minister has a majority – to be doing things that will make Canada’s energy landscape even more competitive, including things like regulatory streamlining and setting very specific timelines,” said Mr. Ebel, who served as a political aide in the government of prime minister Brian Mulroney.

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Companies & investments Mentioned In This Article (2)

Company Price Change Volume
Spectra Energy
SE-N
42.70 0.094 % 2,862,957
Kinder Morgan
KMI-N
35.63 -0.14 % 3,084,736

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