Midstream spending, market value rise to new heights on pipeline demand

HOUSTON — North America’s massive demand for pipelines linking oil fields and refineries has pushed the once obscure midstream sector to gain on the biggest industry players, according to a report by Deloitte.

Since the beginning of the shale production boom, Kinder Morgan and other companies that operate pipelines and storage facilities have boosted their capital spending from about $7 billion in 2006 to $26 billion last year.

And their market value, always dragging behind integrated oil companies and independent producers, has tripled its position within the U.S. oil and gas industry. By 2035, fitting the nation’s new resources with the right infrastructure could be a $200 billion venture, according to Deloitte.

Wall Street is beginning to take notice: Midstream master limited partnerships dominated the market for energy initial public offerings this year as investors bet a combined $3.6 billion on young pipeline and storage firms.

That’s a scenario far removed from the pre-shale era, when midstream companies made up just 7 percent of the oil and gas industry’s market value. Then, the sector could only claim seven companies worth more than $5 billion – that jumped to 25 this year, according to Deloitte.

As hydraulic fracturing enables companies to pump more hydrocarbons out of the ground, volumes of crude oil and natural gas liquids, processed and transported by midstream firms, are expected to grow from 14.5 billion barrels of oil equivalent in 2012 to 15.5 billion barrels in 2015.

The production surge across the country may have even put a damper on exploration and production spending this year as producers see a weak case for pumping from areas without any connection to the plants that turn oil and gas into petroleum products.

In North Dakota’s oil-heavy Bakken Shale, energy companies had to flare off 35 percent of their natural gas production in 2011, according to the Energy Information Administration. And companies in the Eagle Ford Shale in South Texas are turning to the railways to ship out oil and gas, which has flooded the region’s pipeline and storage capacity, Deloitte reported.

Rail shipments grew four times their size from 2011 to 2012 and the oil and gas industry pushed its usage of oil delivery trucks by 38 percent. That’s one of the reasons the EIA projects the midstream sector’s massive growth — which will in part cannibalize rail shipments — won’t slow until the end of the decade.