Back in July, I wrote about a crisis waiting to happen. It involves the aging pipeline, infrastructure, and capped well system throughout the U.S.
At the time, I was commenting on a pipeline rupture in Michigan, but the latest development is unfolding out West, and it is likely to be repeated elsewhere… and soon.
As the network for oil and gas transport grows older, the problems will become worse. And as the aging network begins to break down, it may just provide us with the next big profit-making focus in the energy sector.
This Problem Is Surfacing in Salt Lake City
On Wednesday (December 8), the U.S. Department of Transportation forced Chevron Corp. (NYSE:CVX) to temporarily close a pipeline that happens to run right through Salt Lake City, Utah. The 182-mile pipeline, carrying crude from a terminal in western Colorado to a refinery in Utah, has leaked twice this year, spilling some 1,300 gallons of oil. That amounts to a total of about 31 barrels of oil.
The first leak occurred in June, when all eyes were fixed on a much bigger rupture – in the Gulf of Mexico. Besides, such a small spill would normally not be a major issue…
If it were not for one other matter.
This Chevron pipeline just happens to run right above the water table used as the source of drinking water for more than one million people.
After the second leak on December 1, Chevron apologized and blamed faulty equipment. The temperatures had dipped below freezing, and a valve cracked.
Chevron must now provide federal agencies with a detailed plan to avoid the problem in the future. Until then, the crude is being transported to a refinery in the Salt Lake City area by road. Of course, that will lead immediately to arising traffic concerns, with a noticeable increase in truck usage contributing to an already overtaxed highway system.
A Chevron spokesman has called the episode "highly unusual."
Perhaps, but this is hardly the only such occurrence…
The Pipeline Network Is Showing Its Age
In the U.S., there are currently over 165,000 miles of pipelines moving crude oil and oil products, according to the American Petroleum Institute. Since 1999, the institute's Pipeline Performance Tracking System (PPTS) has logged the number and volume of pipeline leaks.
PPTS figures will tell you that a comparison of 1999-2001 with 2005-2007 shows that the frequency of leaks has declined 60%, while the volume leaked has gone down 52%. Unfortunately, comparative figures made public are not as encouraging in the three years after that.
Additionally, PPTS data do not include all U.S. pipelines, and the registration of leaks by the transport companies remains voluntary.
The patchwork of pipelines crossing the country continues to show its advancing age, and the problems resulting from network failures and equipment malfunctions are intensifying. Replacement schedules continue, but these are not keeping up with either the network difficulties or the requirements of expanding product distribution. The expense of new pipelines is requiring companies to pick and choose among a range of necessary projects.
What's more disconcerting, the more serious ruptures (serious either because of volume or location) are not being reported by the companies; those public disclosures are coming from those harmed, public regulators, or by local officials.
Consider the Enbridge Energy Partners (NYSE:EEP) Michigan spill from this summer, or the more infamous BP (NYSE:BP) leaks in the pipeline coming down from Alaska. In both cases, the company did not report the episode or comment upon it until it had already hit the media. Industrial sources have been telling me for some time that the number of "events" occurring are increasing faster than the number actually reported.
There are moves to increase regulations and oversight. Unfortunately, cuts in most state budgets and an already overburdened federal apparatus make either unlikely to change any time soon.
So where is the investment opportunity in what looks like a train wreck waiting to happen?
Repair Technology Offers Investment Opportunities
The real prospect to repair the network is coming from approaches that do not require the replacement of entire pipeline structures, but develop better technology to repair them. But, as with most technical advances, the investment move here is not a direct one.
The company I like in addressing this issue is still private: Neptune Research Inc. (NRI) out of Lake Park, Florida. For the past 25 years, NRI has pioneered the use of what are called pre-impregnated composites. These involve hybrid carbon and glass fiber polyurethane systems, and provide the opportunity to repair leaks, while flow is moving under pressure, without having to replace the pipes.
It is how their technology is being used that will provide the investment plays. It is attracting attention, with some of the largest oil and gas majors signing on. By the way, CVX has become a client, as are BP, Exxon Mobil Corp. (NYSE:XOM), ConocoPhillips (NYSE:COP), Royal Dutch Shell (RDS), and private Canadian major Syncrude.
And the U.S. Navy and Coast Guard now require the use of NRI products.
However, the immediate place to look toward such a technology impacting on investment opportunities is to follow its introduction by large companies currently servicing the pipeline repair market. These would include Insituform Technologies Inc. (INSU), presently repairing more oil, gas, water, and sewer pipelines worldwide than anybody else. Another is the Mears Group (OTC:MRGUF), specializing in international applications of pipeline, drilling engineering and accident prevention. And then there is Primoris Services Corp. (NASDAQ:PRIM) a company positioning itself for an expanding volume of work across a broad spectrum of pipeline repair needs in sectors from oil and gas to municipal wastewater.
The major breakout for the technology, however, may actually come from related industries. And here, one of NRI's biggest clients may well hold the key – Dow Chemical Co. (NYSE:DOW).
Disclosure: No positions
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