The United States is now producing near-record levels of oil and gas, due primarily to the shale deposits. The next stage of greater energy independence is the construction of infrastructure for the industry. Energy producers are now complaining that there is a shortage of pipeline capacity which is required to transport products to both domestic and international markets. This gap in infrastructure is being filled by master limited partnerships (MLPs), which are publicly traded investment vehicles which use a combination of debt and equity, and are now attracting billions of dollars in capital from the major private equity players. A recent report from the Interstate Natural Gas Association of America says that the North American shale industry will require $30 billion, cumulatively, in investment up to 2035, a figure which may well be on the conservative side.
The once staid and small MLP industry has taken off, and the total market capitalization, which was less than $50 billion in 2003, is now estimated to be more than $450 billion. The growth is being driven by the boom in shale production, and MLPs are well-positioned to handle the capital expenditure requirements. Experts say that in addition to $12 billion for dedicated crude oil pipelines, the shale industry in Canada and the United States will require $2.5 billion every year to build out natural gas infrastructure. The American Petroleum Institute, which is another industry group, puts the estimate higher for the next 12 years.
The growing need for infrastructure
There is a growing understanding that railroads and trucks are not sufficient to meet transportation requirements. For instance, approximately 70% of the production in the Bakken Shale in North Dakota is being transported by rail due to insufficient pipeline capacity. The prospect of the United States becoming an exporter of LNG will put further pressure on the existing infrastructure. Additionally, the approval of five new LNG terminals is also driving spending. MLPs make attractive investments, because they are tax-friendly and insulated from commodity price fluctuations. This is because pipeline operators are paid for the volume they transport, and not the value of what they carry.
Enterprise Products Partners - Positioning itself for future growth
Enterprise Products Partners (NYSE:EPD) is one of the largest publicly traded MLPs, and the company expects to capitalize on the growing North American crude oil production, driven by shale plays such as the Permian and the Bakken, in a few different ways. The company is a partner in the Seaway pipeline, the direction of which has been reversed, so that more crude produced in the inland areas of the US can be made available to Gulf Coast refiners. Most of the additional capacity has already been booked by producers.
The Enterprise Crude Houston storage terminal on the Texas Gulf Coast is designed to provide storage for growing oil production coming from North America and waterborne imports heading for Gulf Coast refineries. The terminal is conveniently accessible for Gulf Coast refineries operated by major energy companies, such as Exxon Mobil (NYSE:XOM), Phillips 66 (NYSE:PSX) and Valero (NYSE:VLO). It is also connected to the docks for convenient transportation of oil by barges.
Finally, EPD expects that the Permian basin in West Texas is going to be a major contributor to crude oil production in North America, with production expected to increase from the current 1 million barrels per day to 2.7 million barrels per day by the year 2020. It currently has storage capacity of approximately 1.4 million barrels at its Midland terminal, but has the capability to expand this capacity to nearly 10 million barrels.
Other major pipeline projects
The Marcellus and Utica shale plays have suffered because of a shortage of pipeline capacity, however, EPD has decided to build the ATEX Express pipeline, which extends for more than 1200 miles from the Appalachian to Houston. It is designed to transport 125,000 barrels of ethane to be used for petrochemical production, with plans to increase this to 265,000 barrels per day, should there be adequate demand due to the ten-year drilling inventory in these shale plays. The other pipeline under construction is the Aegis ethane pipeline from Beaufort, Texas to Louisiana, which will transport 200,000 barrels per day, with a peak capacity of 425,000 barrels a day.
The foresight and caliber of company management is amply demonstrated by the inspired decision in 2011, when it bought the 50% of the Seaway pipeline held by ConocoPhillips. This is a management which knows exactly what it is doing, and has the skills to implement its plans. With drilling inventories of at least 10 to 12 years in the important shale plays, things are looking bright for this company for the foreseeable future. If you want to benefit from the shale boom, but do not want to buy the stocks of producers due to their sensitivity to commodity prices, Enterprise Products Partners is definitely worth further due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.