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A year of fresh starts for the pipeline business

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


A year of fresh starts for the pipeline business

The U.S. oil and gas pipeline sector is starting a new year with a stock market tailwind and a note of optimism from one of its most visible leaders.

The potential for natural gas to play a bigger part in the U.S. energy portfolio will continue to drive investment in pipeline projects, especially in regions where politics or market forces have so far restrained such infrastructure, the new chairman of the Interstate Natural Gas Association of America said.

Bill Yardley, executive vice president at Enbridge Inc. and the association's incoming chairman, said pipeline companies are ready to invest in new projects even after most had a tough year on the stock market in 2018.

"The demand is truly there," the executive said. "We are seeing it especially, frankly, in some areas that are most challenging to us as pipeline builders." Yardley listed electric power generation, growth for local gas distribution companies and LNG exports among the key sources of gas demand.

The most challenging area for U.S. pipelines might be New England. Yardley noted that Enbridge or Spectra Energy Corp., which Enbridge absorbed in 2017, has had a pipeline project "in flight" there every year for the past 10 years.

Yardley said Massachusetts officials and other New England leaders must work out a solution to their energy needs and, if they decide natural gas should have a larger role, pass legislation that allows electric power generators to support additional pipeline capacity with firm transportation service contracts, beyond the gas utilities that already form the core base of customers for most New England projects.

Pipeline companies may be further encouraged to invest by a stock price rally sweeping the sector that could indicate a material turnaround for some beleaguered equity values, some industry experts said.

The midstream sector's bellwether Alerian Master Limited Partnership Index was up nearly 12% in the first days of 2019, outpacing the S&P 500's 2.7% gain to Jan. 8, after a rough 2018 in which investors' frustration with the cash-leaking MLP model and declining oil prices translated into a 19% plunge in the Alerian.

The poor 2018 culminated in a midstream energy stock plummet in December, even after many sector players simplified their corporate structures to address investors' concerns about the master limited partnership model and reported strong consecutive quarterly earnings.

With the price of West Texas Intermediate crude oil back up 9.6% so far in 2019, settling at $49.78 per barrel on Jan. 8., investor sentiment is improving. "I am cautiously optimistic that we see a big sustained rally in midstream this year after [simplification] transactions settle and clear out. On the other hand, the market needs to differentiate and signal to management teams what behaviors they'd like to see," CBRE Clarion Securities analyst and MLP expert Hinds Howard said in an email.

The challenge of building pipe in the Northeast, though, has National Grid USA looking for ways to increase its gas access in the region in the next winter without adding large-scale pipelines.

"National Grid is committed to transforming its natural gas networks with smarter, cleaner and more resilient energy solutions to meet the goal of reducing greenhouse gas emissions by 80 percent by 2050," the company said in a Jan. 10 email to prospective bidders. "The company will evaluate and consider all offers from an experienced contractor that successfully demonstrate an ability to reduce the company's reliance on pipeline projects as early as the heating season commencing November 1, 2019."

The company in its request for proposals said it is considering doing more with renewable natural gas, which is derived from biological sources such as landfills or wastewater treatment, compressed natural gas and liquefied natural gas. But the company also emphasized that it wants to hear about "other innovative supply-side proposals" that it does not know about yet.