The toll roads of energy
It should come as no surprise that the U.S. is the world’s largest consumer of oil – but it’s also one of the top oil-producing nations in the world. Thanks to its vast fossil fuel resources and advancing technologies that are enabling commercially viable production, the U.S. is fast becoming less dependent on foreign oil to meet energy needs. North America is also leading in natural gas production. According to the Energy Information Administration, the U.S. became the world's largest natural gas producer in 2009.
Production is one thing, however. Transporting these valuable resources from where they are being collected deep beneath the Earth’s surface to a broad and diverse consumer base is another. That’s where North America’s vast pipeline infrastructure comes into advantageous play.
Pipelines operate at the crucial middle of the energy value chain (the midstream segment), linking production of energy, which lies at the beginning of the energy value chain (the upstream segment), with areas of demand (the downstream segment). Pipelines are interconnected networks that transport crude oil and natural gas from wellhead to storage and processing or refineries, where the usable products are freed from impurities and piped to areas of use.
The energy value chain
Once these energy resources reach their final destinations, they do everything from fuel vehicles and heat homes to run some of the nation’s largest power plants, which in turn produce the energy that powers industry and manufacturing. But what we get from crude oil and natural gas goes far beyond fuel; other processes alter the molecular structure of oil and gas to make petrochemicals, which become the feedstock (raw materials) used to make a host of other products, ranging from soap and fertilizer to epoxies and explosives, from synthetic fibers and adhesives to paints and even medicine.
A pioneering American spirit
Thanks to an early start – oil exploration and drilling in the U.S. began in the mid-1800s – the U.S. now has one of the largest and most developed pipeline systems in the world. This expansive infrastructure has about 2.6 million miles of natural gas and liquid petroleum products pipelines in place.1
The country’s natural gas pipeline system came along a little later. During the bulk of the 19th century, natural gas was used almost exclusively for lighting, largely because there was no pipeline system in place to transport it over long distances, or into homes and businesses. As electricity entered the picture, natural gas lights were converted into electric lights, which in turn drove the natural gas industry to create new uses for natural gas.
The invention of the Bunsen burner in 1885 opened up many new avenues for natural gas usage, including as a fuel source for cooking and heating, as well as other applications; that invention was followed by the creation of the country’s first successful natural gas pipeline in 1891.2 Progress initially was slow, but innovation in uses for natural gas served as prolific drivers of demand, and natural gas soon became a fuel for myriad applications, ranging from powering water heaters and boilers to commercial and industrial applications. After World War II, pipe building technologies had advanced to the point they could support more extensive gas pipeline build-out, and the race was on to build an expansive network.
Today, the U.S. natural gas pipeline network is extensive. Over the past 60 years, billions of dollars have been invested in the build-out of nearly 2.4 million miles of natural gas pipelines across the country including transmission pipelines, gathering lines and distribution mains.3
Pipeline types dictated by need
Different types of pipelines are needed depending on the resource being transported and its intended destination.
Oil and natural gas are collected in the upstream sector, where exploration and production companies drill and develop these natural resources. Once the oil and gas are removed from the well, they are transported through separate pipeline gathering systems consisting of low-pressure, small-diameter pipes.
Dry gas is transported directly to large-diameter transmission pipelines. Wet gas – gas containing liquids – is sent to gas processing facilities, where the natural gas is separated from natural gas liquids (NGLs). These NGLs are then transported individually to NGL fractionators for additional processing and then through interstate pipelines for distribution. Crude oil is delivered first to central gathering facilities called oil batteries. Larger diameter pipelines are used to move the oil to refineries, which often are located at great distances from where the oil is produced. The largest (diameter-wise and in length) pipelines ̶ transmission lines ̶ may move crude (and other liquids) all the way across the country, as many refineries are located in the Gulf coastal states of Texas and Louisiana. After crude oil is refined, the end products are then transported through small-diameter, refined product and distribution pipelines, which are composed of several interconnected pipes, to storage terminals or local distribution centers.
Along the way
Gas that is transported via long-distance pipelines is compressed to pressures ranging from 200 to 1,500 pounds per square inch, which reduces its volume by up to 600 times.2 This gas must be re-pressurized at various points en route to its destination. This is done by turbine compressors at compressor stations, which are located at 40- to 100-mile intervals along the pipeline. The turbine (or in some cases a motor or engine) that re-pressurizes the gas is fueled by a small amount of the gas the pipeline is carrying.
Interstate natural gas pipelines are also outfitted with metering and control stations, which allow the pipeline companies to measure and track the flow of gas as it makes its way to distribution terminals. In addition, valves are used throughout the network, generally placed every five to 20 miles along the pipeline, so that operators can stop the flow of gas in the event that a section of pipe needs repair or maintenance.
Similarly, oil traveling through pipelines is kept moving by powerful pumps driven by electric motors, or in some cases by diesel engines or gas turbines. The pumps are located at the originating pipelines and also spaced along the pipeline. The intervals between pipelines can be 20 to 100 miles, based on the pressure at which the pipeline is operated and the type of terrain it’s moving through. Crude oil generally moves through the pipelines at the rate of three to eight miles per hour.
If you could see all of this, you would be looking at a sophisticated, complicated network; however, the majority of oil and natural gas pipelines are buried at least 30 inches underground but typically five to six feet deep.
Big and getting bigger
North America’s pipeline infrastructure is large because North America is so expansive. Most oil and gas production areas in North America are located at great distances from where energy is needed, hence the need for pipeline transportation. The largest sources of supply can be found in sparsely populated areas such as the mid-continent, North Dakota and Texas. While the energy resources reside in remote and rural areas, the sources of greatest demand are large urban areas, such as New York City, Los Angeles, Chicago, Boston and Miami. The map below indicates pipeline infrastructure build-out underway today to support oil, natural gas and natural gas liquids transportation flows from production areas to demand centers.
Pipeline build-out flows
Source: Tortoise Capital Advisors
The shale basins shown on the supply map above are the catalysts driving the growth in oil and natural gas production and meaningful build-out in the energy pipeline sector. Recently, there was very little activity from these basins in terms of energy supply. But advances in drilling technologies – specifically, the combination of horizontal drilling and hydraulic fracturing – have enabled exploration and production companies to access these resource-rich shales in economically viable ways.
The four reservoirs that are making headlines currently are the Bakken in North Dakota, Montana and extending into Canada, the Marcellus, which spans several states but is primarily in Northwest and Southwest Pennsylvania, the Eagle Ford in South Texas, and the Permian, which is in West Texas and the Southeastern part of New Mexico. The Marcellus holds primarily natural gas with both wet and dry gas areas. The Bakken is primarily a crude oil play and the Eagle Ford has crude oil, and both wet and dry natural gas environments. The Permian holds a variety of oil, natural gas liquids and natural gas. The significant production activity in these fields is driving the need for significant pipeline build-out that can transport the copious amounts of these resources from where they are produced to where they are used – specifically, demand centers for natural gas and refiners for crude oil. It is estimated that approximately 300,000 miles of new pipeline will be required during the next two decades, creating approximately $550 billion in investment potential.4
Pipeline reversals are changing the flow
In addition to all of this new construction, investments also are being made to enable pipelines to reverse the direction they transport oil or natural gas. As an example, historically the Gulf Coast has produced gas and shipped it to the heavily populated East Coast. But due to the tremendous production out of the Marcellus, the East Coast no longer needs to pipe in natural gas throughout most of the year. As a result, some pipelines are adding bi-directional capability and reversing flow.
A particularly noteworthy example of a pipeline reversal is the Rockies Express Pipeline (REX), which in 2006 began transporting natural gas out of the Rocky Mountains, beginning in Colorado and moving north to Wyoming and then east to the Ohio-Pennsylvania border. In June of 2014, this pipeline, one of the longest in the U.S., reversed its flow to destinations in Ohio, Indiana and Illinois, areas of increasing demand. It’s happening with crude oil pipelines, too. The Seaway Pipeline, which originally delivered imported oil from Freeport, Texas to the Cushing storage hub in Oklahoma, began transporting from Cushing to Houston in 2012, creating the first direct link to refineries along the Gulf Coast.
Turning one into another
While crude oil production volumes are overwhelming both pipeline capacity and location of the existing pipeline system, some natural gas carriers are facing diminishing demand for their services, due to shifting sources of natural gas production and demand. One solution to help alleviate both problems is to switch them out ― use these available and underutilized natural gas pipelines, which already have right-of-way approval ― to transport oil instead. Converting existing pipelines is faster and cheaper than building new ones, and enables pipeline companies to sidestep lengthy legal and bureaucratic battles around permitting.
North America’s pipeline infrastructure is large because North America is so expansive.
Investing in pipeline infrastructure
Pipeline companies generally do not own the products they transport. Instead, they are paid by the oil and gas producers and major consumers of the products – industry and utilities – for transporting the products through the pipelines.
What makes pipeline companies attractive long-term investment opportunities is that the pipelines they own are well-established, durable physical assets with predictable cash flow streams. Pipeline companies represent real, physical, enduring infrastructure with low risk of falling into disuse or becoming out of date, and have economic lives that are measured over decades, and benefit from relatively inelastic demand. Existing pipeline companies are near-natural monopolies, dominating the markets they serve and enjoying significant barriers to entry – from cost to regulatory right of ways.
Because they do not own the commodities that are transported through their networks, pipeline companies generally have limited direct commodity price exposure and make money from other energy companies who pay a fee to effectively “rent” the pipelines, terminals and services needed to transport oil and natural gas from where they are gathered to refineries, storage facilities and end points of usage.
The fees they charge are generally tied to multi-year (five to 20) contracts, providing predictable and steady cash flows for a period of time. Fees are recontracted when the contracts expire. Most natural gas pipeline contracts are tied to capacity reservations, typically called “take or pay,” meaning producers pay to use the pipelines for a given amount of time, even if part of that time nothing is being transported. Petroleum pipelines operate a little bit more like the toll roads we sometimes drive on to reach a given destination. A volume-based fee is charged to move a given amount of product through; as dictated their fees are also tied to an inflation escalator, which is based on the Producer Price Index and is adjusted annually. Interstate pipelines are regulated by the Federal Energy Regulatory Commission, while intrastate pipelines are generally regulated by a variety of state agencies.
As a result, pipelines are similar to toll roads for energy. Just as a toll road does not distinguish between a Bentley and a car of lesser value so long as the toll is paid, much the same can be said for the price of oil or gas moving through the nation’s pipelines.
Sustaining American life and growth
As North American oil and natural gas production continues to gain momentum, so does the critical need for pipeline infrastructure build-out. In an energy-driven society such as the U.S., pipelines are more than infrastructure – they are the irreplaceable lifeline sustaining American life and economic growth.
Just as a toll road does not distinguish between a Bentley and a car of lesser value so long as the toll is paid, much of the same can be said for the price of oil or gas moving through our nation’s pipelines.
- U.S. Department of Transportation
- American Petroleum Institute
- INGAA (Interstate Natural Gas Association of America)