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Lack of pipelines cuts into oil and gas industry's winnings

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Lack of pipelines cuts into oil and gas industry's winnings

The U.S. has oil and natural gas production in spades, but a shortfall in pipeline infrastructure across the country could mess up its hand.

The lack of oil and gas pipeline capacity could be most problematic in Texas and the Northeast.

"You can see what happened in the Marcellus: gas took off and there was no way to move it," said Ken Medlock, a professor of energy studies at Rice University. "That spurred a wave of investment. Initially, it was to get the gas to the coast and New England, but there are still some regulatory hurdles ... in spite of the fact that those areas really could use that gas."

Producers need to reach New England and other priority markets. The pro-gas Consumer Energy Alliance has projected that as much as 31% of U.S. electricity generation capacity could be removed from the grid if the oil and gas industry cannot pick up the pace of pipeline construction, weighted down by unfavorable regulation, public opposition and economics.

TransCanada Corp. President and CEO Russell Girling discussed some of the problems of getting pipeline in the ground at a recent industry conference. His company is still trying complete the controversial Keystone XL crude oil pipeline and developing other oil and gas lines across the U.S.

"We are slow getting infrastructure done; we're inefficient in that our costs are onerous and uncompetitive," Girling said at IHS Markit's CERAWeek in Houston. "As we have stalled development, we have lost market share."

While the Keystone XL has been a poster child for regulatory delays, gas pipelines have also slowed down at the state and federal level. There are around $20 billion worth of pipeline projects in the development and permitting stages that would move gas from the Marcellus and Utica shales to New York and New England. Unconventional gas production became a market changer about five years before shale oil entered the market in a significant way at the start of this decade, but both are now dealing with the same pains.

In one example of the U.S. pipeline constraints, a Boston LNG import terminal recently accepted a shipment from Russia to provide fuel for the region, which regularly sees gas and electricity prices spike in winter. New England cannot receive cargoes from U.S. Gulf Coast LNG terminals because the Jones Act, a section of the Merchant Marine Act of 1920, requires goods moved between U.S. ports to be carried on ships that are made in America and owned and crewed by Americans, among other restrictions, and the U.S. does not have LNG tankers that meet those requirements.

In the meantime, gas from Pennsylvania and Ohio flows south to the Gulf Coast, where it competes with gas from the Permian Basin and the Eagle Ford, Barnett and Haynesville shales.

"You've got to move it where you can move it," Medlock said.

The transportation of oil and gas products from north to south on reversed pipelines has proved simpler than trying to get a permit for pipelines in the Northeast. Kinder Morgan Inc. President Stephen Kean observed at CERAWeek that his company and others would like to get the permits to build pipelines from Pennsylvania into New England, but Kinder Morgan's proposed Northeast Energy Direct and other projects have stalled in a difficult regulatory environment, and the pipeline companies have turned to other markets.

"There's more [gas] being consumed on the Gulf Coast," Kean said. "So what used to be the supply area is now the market area."

Regulatory delays have been less of a factor for oil pipelines. But explosive production growth that has left supporting infrastructure in the dust. With an estimated 1.1 million barrels per day expected to come online this year, producers in places like the isolated Bakken in North Dakota compete for any available pipeline capacity and turn to rail shipments.

"At one point, Philadelphia was the biggest recipient of Bakken crude. They were also taking Bakken oil to Washington State," said Jonathan Garrett, Wood Mackenzie's research director for Lower 48 upstream oil and gas. "But the Gulf Coast is most appealing."

Some oil and gas producers are trying to ship their products overseas to avoid the market jam in the U.S. South. "The only answer is to export a lot of these commodities to Europe," Energy Transfer Partners LP CEO Kelcy Warren said in recent comments. "So we're building a lot of facilities on Marcus Hook (Pa.)."

The Gulf Coast is also the target for much of the production coming from the Permian Basin. Unconventional production continues to grow rapidly. Unlike interstate pipelines that are subject to regulation by the federal government and more than one state, most Permian pipelines only have to deal with Texas regulators, which speeds up the process.

"The stars are aligning with production in the Permian growing aggressively and infrastructure developing," Medlock said. "It's going to refining and petrochemical facilities, to export facilities. A lot of investment has been going on there already."

But pipeline infrastructure has struggled to keep up with Permian production. Garrett said it is a case of simple economics. Pipeline companies need a long commitment to make their investment pay off. The companies ask, "'What's the size of the opportunity? What are the economics here?'" Garrett said.

With Permian production going strong, billions of dollars are being poured into pipeline infrastructure. The one thing that could slow down the oil production boom in West Texas is a massive amount of gas associated with that production, which has made the Permian one of the nation's largest gas production areas almost by accident.

"You have a lot gas that is going to be pumped, and that requires a totally different infrastructure," Medlock said. "And you have to get [the pipelines] to LNG facilities, which may not be ready for them yet. If you can't do anything with the gas, you've got slow down."