The $250 Billion Problem That's Holding Back American Energy Independence

Photo credit: Flickr/shannonpatrick17

Oil and gas producers struggle with a number of issues, but there is one in particular that is really holding them back: lack of infrastructure. By some estimates, this is a $250 billion problem for the industry. That is the amount of midstream infrastructure investment that's required to get the record volumes of oil and gas moving from production basins to market centers. In fact, this past year a number of producers have pointed out that lack of necessary infrastructure is costing them valuable production. In some cases this production is simply being shut in; however, as fellow Fool Tyler Crow recently pointed out, lack of infrastructure is actually costing Bakken producers more than a billion dollars each year.

One producer that recently acknowledged its infrastructure issues is Magnum Hunter Resources (NYSE: MHR  )  In fact, in the last quarter, the company had 1,873 barrels of oil equivalent worth of production per day shut in due to infrastructure issues. That would have boosted its production for the quarter by another 12%, which is no meager sum for the small oil and gas producer.

Part of the problem is of the company's own creation; it simply discovered more natural gas liquids than it had previously estimated that it would find. While that's a good problem to have, it still was a drag on the quarter -- the company's midstream subsidiary needed to invest in additional equipment as well as wait for new permits to be issued before its added production could start flowing.

In addition to the lack of pipeline capacity, Magnum Hunter had to wait for the processing capacity at the MarkWest (NYSE: MWE  ) Mobley plant to be expanded to handle the additional volume. Currently, the plant has enough planned capacity, so this won't become problematic for Magnum Hunter for at least the next year.

One of the bigger issues, though, is getting these volumes of natural gas liquids to customers; its estimated that more than 1.4 million barrels of liquids per day will be produced in the Marcellus and Utica by 2020, but there is just 400,000 barrels per day of takeaway capacity currently under construction. MarkWest is one of a number of midstream companies working on a long-term solution. The company recently announced a joint venture with Kinder Morgan Partners (NYSE: KMP  ) on an natural gas liquids pipeline to the nation's Gulf Coast petrochemical center. The project, which will also include a processing complex in Ohio and fractionation facilities on the Gulf Coast, won't be operational until the fourth quarter of 2015.

It's the third proposed project that is designed to link the Marcellus and Utica to the Gulf Coast. The first project announced was Enterprise Product Partner's (NYSE: EPD  ) ATEX Express. The key to getting it off the ground was the fact that about 70% of the route uses existing pipeline which has been repurposed for the project. Not only does this limit the environmental impact of the project, which is important in light of the issues that the Keystone XL has encountered, but it also enables Enterprise to get the work done faster and cheaper. Similarly, MarkWest and Kinder Morgan's pipeline will convert 900 miles of existing pipe while building another 200 miles to get the project into service.

While the issues in Appalachia have led to lost revenue and have crimped profits, it's not the only region that has been plagued by infrastructure problems. Producers in the Bakken have really had a rough time getting natural gas production into pipes. In fact, Magnum Hunter noted that it was forced to flare 12 million-15 million cubic feet of natural gas per day last quarter. Its midstream partner, ONEOK Partners (NYSE: OKS  ) , has encountered significant problems in the process of connecting all of its wells. It's so bad that Glenn Dawson, the president of Magnum Hunter's Williston Basin unit, has called the process "very slow and painful". The plan is to have the gathering system complete by the third quarter of this year.

Clearly, lack of infrastructure is holding back the production of oil and gas. Midstream companies aren't the ones to blame -- they are investing billions to move these projects forward. In fact, ONEOK has already announced more than $5 billion in growth projects through 2015 and has another couple of billion dollars in projects that it has yet to announce. Meanwhile, MarkWest is planning to invest up to $1.8 billion this year alone, while Kinder Morgan has more than $13 billion in growth opportunities over the next five years.

While some blame can be levied on a slow permitting process, the real obstacle is that production is moving faster than the infrastructure to handle it can be built. This could spell opportunity for investors because midstream operators will need access to capital to move these future projects forward.  

This is why finding the right plays while historic amounts of capital expenditures are flooding the industry is critically important to padding your investment nest egg. To help you find the right plays, the Motley Fool is offering a comprehensive look at three energy companies that are best positioned to profit from this transformation time in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2013, at 9:03 PM, dadx wrote:

    how about stop exporting American oil to japan and china?

  • Report this Comment On August 17, 2013, at 12:47 PM, RoyBrooks8 wrote:

    Investing now is like going to Vegas, it's very risky,

    unless you have inside info. With "O" in the white

    house I never know what to expect. This country will never recover with the congress we have now.

    No one obeys our laws, (congress and the so-called president. ignore the constitution. We can only expect chaos with this president. He is a

    muslim and wants to change our great country into

    a third world country. We need God back in our

    lives, not some phoney middle east religion . Our

    government is rotten from the core.

  • Report this Comment On August 17, 2013, at 2:08 PM, bennu217 wrote:

    Rather than sink additional investment into infrastructure to speed up the consumption of a finite resource, how about investing in infrastructure to create and supply sustainable energy? If nothing else, your grandkids will thank you.

  • Report this Comment On August 18, 2013, at 4:24 AM, tomd728 wrote:

    Mr.Roy Brooks......Obama has not shown any indication that he has the slightest empathy with radical Islam.In fact, he is more despised than even George W.Bush by that movement.

    Obama certainly is however an avowed socialist who is clearly determined to lower our standards while creating and raising the benefits of those who contribute little or nothing to our economy,show the slightest respect to family values,ignore their opportunities for education and self improvement,while demanding more and adding little to the quality of life.

    Investment in great companies is not a "casino adventure" but an avenue to grow personal asset size by merely putting money behind proven CEOs and cadre, their new and timeless products,with worldwide growth and attendant profit with re-investment.These enterprises are easy to find throughout U.S.industry.

    Sweeping statements such as"no one obeys the law" is a bit over the top as we are not yet an anarchy.

    We all need to blow off some steam and I for one feel your pain......

    To better days my friend !!!!!!!!

  • Report this Comment On August 18, 2013, at 4:58 AM, impeachobama wrote:

    Man, The $250 Billion Problem Holding back America ? " I didn't know that the President's job paid that much.

  • Report this Comment On August 23, 2013, at 3:57 PM, ddepperman wrote:

    I just ran a fool "presentation" on the stock that's going to just "explode this year and the guy making the pitch managed to go on for maybe 30 minutes about "this stock" and finally ended without naming as promised. I never listen to these crappy presentations, and this one ran in the background while I did my work, wondering from time to time whether he would ever get to the stock.

    He didn't, just a great offer to buy into Rule Breakers. Good god you morons, why do you even run this crap with no payoff as promised. motley fool should be called moronic fool, to represent anyone who listens to this s**t and who is wiling to go the extra mile to make this kind of talk. Who is stupid enough to buy into your newsletters after listening to this! Jeez louise.

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