Energy Alerts, June 3, 2015

The boom in shale oil and gas isn’t just unleashing a flood of new energy sources in the U.S. It’s also driving a massive build-out of the nation’s energy-carrying infrastructure, which is needed to bring that big bounty of crude oil and natural gas to market. At the same time, big changes for the electric grid mean utilities are investing heavily in new transmission lines to make sure your lights stay on.

Pipes, Tanks and Trains

The growth in oil output alone is taxing the energy industry’s carrying capacity. Though it briefly leveled off this winter when prices plummeted, crude production is on the rise again. By the end of the year, there’s a very good chance U.S. output will eclipse the record of roughly 10 million barrels per day, set in November 1970. Moreover, drillers are also tapping significant amounts of ethane, propane and other liquid petroleum.

Getting that gusher of oil from wells in N.D. and Texas to refineries on the coasts calls for more pipelines, more rail tanker cars and more storage depots. Last year, market research firm Industrial Info Resources tallied proposed pipeline projects that would be capable of moving a combined 8.2 million barrels per day — almost matching today’s 9.5 million barrels of daily output — and cost tens of billions of dollars to build. Most of that new construction figures to be in the Midwest.

IIR also identified proposed storage depot projects that would provide more than 80 million barrels of capacity, most of them in the West and Southwest. Firms such as Enterprise Products Partners and Kinder Morgan are betting on a mounting need for more storage tanks, especially after the big rise in crude oil stockpiles this winter sparked concerns that storage space would run out and helped push oil prices down.

Much of the surge in oil production isn’t getting to refineries by pipeline; it’s coming by rail. In North Dakota — the second-biggest oil-producing state (Texas is first) — rail is crucial to serving the mushrooming oil wells pumping crude from the Bakken Shale formation. But because this crude can be volatile and prone to exploding during train derailments, federal regulators are requiring the energy industry to upgrade or replace thousands of older rail tanker cars deemed unsafe for shipping crude (or ethanol, another volatile fuel).

How those regulations affect the crude-by-rail business remains to be seen. But the oil industry is clearly not happy with the mandate to overhaul or replace what a study by the Brattle Group estimates could be 30,000 rail tanker cars. American Petroleum Institute spokesman Brian Straessle said in a May 8 interview that the group, which represents oil and gas producers, was still reviewing the Department of Transportation’s new rules, but called them “very difficult” to implement. He questioned whether the rail industry has the ability to deliver so many new or upgraded tanker cars on the tight schedule regulators are requiring. Three days later, API filed a lawsuit against DOT to block the rules.

A slew of orders for new tanker cars figures to benefit manufacturers such as Trinity Industries, Union Tank Car Co. and the Greenbrier Cos. But DOT’s crude-by-rail rules pose challenges for those companies, too. In particular, car makers worry about the government’s mandate that tanker cars eventually adopt electronically controlled pneumatic brakes to prevent future derailments. The Rail Supply Institute, which represents car makers, argues that ECP is an expensive technology that does little to enhance safety.

While oil production draws near its all-time high, natural gas output is already breaking records. Gas production set a new high in December of last year and is likely to eclipse that record before long. Meanwhile, gas demand is also building (as we wrote two weeks ago). New supply and new demand spell many new gas pipelines crisscrossing the country.

The Federal Energy Regulatory Commission, which approves applications to build interstate gas pipelines, is tracking a bevy of proposed gas lines to keep up with supply and demand. All told, FERC data show enough pending pipelines to move about 15 billion cubic feet of gas per day — equal to about 20% of current gas usage. Major builders include Transcontinental Gas Pipe Line Co. and Energy Transfer Partners.

Power Lines

Meanwhile, electric utilities are pursuing more transmission capacity. Unlike for the oil and gas industries, the challenge for utilities isn’t moving more of the commodity they produce or sell; it’s rerouting power on the electric grid from new generating stations — as old coal-fired power plants close and gas-fired plants replace them — and coping with the ebbs and flows of highly variable wind and solar power.

That means more high-voltage power lines throughout the U.S. From now through 2017, electric utilities plan to spend nearly $20 billion per year on new transmission lines, according to the Edison Electric Institute, a utility trade group. Some big spenders include Entergy Corp., Southern Co. and Southern California Edison.

Many utilities will also be shelling out more for large batteries to store excess energy during periods of low demand and quickly deliver it to customers when demand jumps — good news for battery firms such as Panasonic, Toshiba and NEC Energy Solutions.

A Note on Oil Statistics

Readers sometimes ask about the best sources of information on oil production and consumption, and of other statistics. The Department of Energy’s Energy Information Administration publishes a wide variety of reports on these topics; so wide, in fact, that it can be a bit overwhelming.

Perhaps the single most informative snapshot of the U.S. oil industry appears on Wednesdays, when EIA publishes its Weekly Petroleum Status Report. The Status Reports Highlights are a handy summary that runs down total petroleum consumption for the previous week, along with the rise or fall in stockpiles of crude and gasoline; how close to full capacity the nation’s refineries are operating; and how much gasoline and diesel refiners churned out that week. The Data Overview is even more informative, with details on oil production and refinery activity by region.

But note that EIA’s weekly report of crude oil output is based on an estimation and isn’t as accurate as the monthly figures the agency puts out. This winter, the weekly updates were pegging daily U.S. oil production at 9.1 million to 9.3 million barrels. But in hindsight, the monthly report quotes output at 9.4 million barrels in January and February. EIA publishes the monthly figures with a two-month lag, but given their greater accuracy, they’re worth waiting for.