We’re Riding These Bottlenecks to the Bank
Amy Harder asked a pretty straight forward question in National Journal yesterday.
We’ve found vast new stores of domestic energy, she points out, but how do we move it around the country?
In light of the recent crude oil train accident in North Dakota, she brings up a pretty big point. The entire infrastructure network of pipelines, rail transit, barge traffic, and high-power lines hardly seems up to the task.
This problem isn’t new. But thanks to the U.S. oil and gas boom, these bottlenecks are getting worse.
As U.S. Senator Lisa Murkowski (R-Alaska) puts it, “Everybody wants to talk about that [the energy boom], but unless you can move it, you’re stranded.”
The fact is, the U.S. energy transport network is growing old. Almost 60% of the pipeline system is overdue for either a significant overhaul or an outright replacement.
And that is just one aspect of a giant network of systems…
For investors, that means there are going to be several new ways to profit…
These Bottlenecks = Big New Opportunities
So where are these bottlenecks? The truth is, they are everywhere.
In fact, here’s a quick rundown of the areas that will need to be addressed.
As I’ve discussed in OEI before, the sheer cost of pipeline projects, along with the politics surrounding major new efforts such as the Keystone XL pipeline have prompted a concerted move to transport crude via rail.
Rail transit has been growing in volume, with most venues recording triple-digit increases in less than a year. However, the age of the rail system itself, plus the risk considerations attendant to the increase usage, has brought about its own set of problems.
What’s more, with the movement of natural gas, the nation remains dependent upon pipelines augmented by some capacity for liquefied natural gas (LNG) and compressed natural gas (CNG) transport by barge and truck. And it is here that the largess of shale gas, tight gas, and coal bed methane is putting additional strain on transport.
Plus, every indication points toward a continuing (and accelerating) shift from coal to gas as the fuel source of choice in electricity generation. That merely accentuates the need for more pipeline investment.
The power generation side is also experiencing additional pressure from the rise in renewables including solar, wind, geothermal, even tidal and kinetic. The bottlenecks here involve a major move to increase grid capacity in a range of feeder, long, and distribution lines.
The market is also seeing an increase in small-capacity and localized power production units, smart grid technologies to increase efficient usage of electricity, along with advances in metering and leak prevention techniques to reduce overhead expenses in the movements of oil and gas.
A similar development is well underway in the production and use of liquid renewables such as biofuel and algae-based oil. All of these new sources will also require their own storage, transport, and distributional stages.
Even coal has its transport bottlenecks.
Despite the move away from coal for electricity, there remain two other markets that still have significant needs. One is thermal coal for heat generation. The other is metallurgical.
As coal producers experience a transition of coal into a supplemental rather than primary fuel source in many regional power infrastructures, the need for metallurgical coal is increasing. This is the high-grade ore needed for steel and other heavy metal production. It has become an increasingly important source of export revenues for American coal companies.
Unfortunately, the network of barge traffic, port facilities, offloading locations, and dry bulk carriers for long hauls is limiting the benefits from a rising international demand.
Once again, a transport bottleneck and shortfall is impeding an expansion of trade.
All of these situations are going to be getting worse, and this is where we are going to be realizing some nice gains.
Profiting from Energy Transport Bottlenecks
When it comes to solving these bottlenecks, there are three elements to watch here.
The first involves the massive need to plan and design the new and refurbished infrastructure. Before it is all said and done, there will be billions of dollars in contracts handed out to companies that oversee the initial route determination and logistics. The front end engineering and design (FEED) requirements alone will be staggering.
Second, are the companies involved in the actual construction, coordination, and operation of the huge transport network? In addition to the “metal and hardware” components, greater integration across the range of energy sources will be mandated.
The balance among sources will also be changing, with a larger number of sources providing a rising need for integration among them. This is the third element we will be taking a look at.
The mix of traditional, unconventional, and renewable energies is already ushering in the next major stage in energy sector development. This will oblige increasing integration among energy types.
Talking about the energy balance means little unless there are genuine opportunities to exchange one energy source for another. That is certainly happening in the selection among various fueling options for electricity production. Options between oil products on the one hand and natural gas and natural gas liquids on the other as feeder stock for the chemical and petrochemical industries are other examples.
The main limitation here remains in transport fuels. While there has been some increase in natural gas-fueled vehicles (especially in the heavier end of trucking classes) and a slower rise in electric cars, we still remain dependent upon gasoline and diesel. Until this primary energy usage becomes genuinely diversified, the emergence of a true energy balance will remain elusive.
Well before that takes place, however, investment opportunities will present themselves. And the profitability of the transport component will be rise even more.
And over the next twelve months, we are going to be riding these transformations to the bank.