Infrastructure Upgrades Needed to Fuel Domestic Energy Boom

More pipeline infrastructure could move the United States closer to energy independence.

In this June 27, 2012 file photo, ships bringing oil drilling equipment to Alaska, left, pass through Seattle's Elliott Bay as a Washington State Ferry passes on its way into Seattle.

Ships bring oil drilling equipment to Alaska. The lack of infrastructure in the U.S. is leading some oil companies to ship products by rail, but experts say a pipeline is the most efficient way to transport oil and gas.

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Much has been said of the potential for the United States to become energy independent thanks to the recent boom in domestic energy production. But according to experts, growth in the industry could be stunted without serious expansion in the nation's network of pipelines and other energy infrastructure.

While Quinn Kiley, senior portfolio manager at FAMCO MLP, a division of Advisory Research Inc., characterizes advances in the country's infrastructure as "industry and global leading," he says the nation needs to bring additional pipeline capacity online to keep up with the growing domestic production and potential imports flowing from Canada and Mexico.

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"If you have new and growing production, you need additional infrastructure whether it's from the oil sands or the Bakken Shale," says Kiley, whose firm specializes in energy infrastructure investing. "Today you have a lot of that crude [oil] coming at a very disjointed, nonlinear path to get to where it needs to go."

"There's going to be a time where supply is going to outstrip the existing infrastructure and you're going to have to fill that in," Kiley adds.

According to Darren Schuringa, the price tag for all the infrastructure improvements needed for the United States to achieve energy independence amounts to around $300 billion over the next decade or so, no small sum considering the still-shaky ground on which the U.S. economy sits.

Still, they are key investments to make, argues Schuringa, founder of investment firm Yorkville Capital, especially if the United States wants to free itself of its dependence on unfriendly countries for crucial energy supplies. Proposed pipeline projects such as the Keystone XL could potentially help expedite that process, proponents argue, but construction of the pipeline has been held up for several years due to environmental concerns.

Right now, the lack of infrastructure is leading some oil companies to ship product by rail. While that's solved the short-term transportation issues and given U.S. and Canadian railway companies a boost, a longer term solution is needed, experts argue, and a pipeline is the most efficient way to transport oil and gas.

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"Rail is part of the long-term solution but it's always more efficient to pipe than it is to rail," Kiley says, adding that a type of asset such as the Keystone XL is crucial because it helps connect burgeoning centers of supply with existing and potentially future demand centers.

"It's part of a system of pipelines that allows you and I, in different parts of the country, to get access to the same commodities, the same petrochemical products, and natural gas," Kiley says.

According to the U.S. Energy Information Administration, several new pipeline projects already in the works are designed to better regulate the flow of oil through Cushing, Okla., which historically has been the distribution hub for both imported and West Texas oil.

In just the past three years, pipeline capacity for getting crude oil to Cushing increased by about 815,000 barrels per day, the EIA reported, mostly thanks to the construction of the southern leg of TransCanada's Keystone pipeline that originates in Alberta, Canada. A slew of other projects to transport crude from Cushing to Gulf Coast refineries are being planned, too.

With crude oil output expected to rise 815,000 barrels a day in 2013 to more than 7 million barrels a day, experts say the expanded pipeline capacity will help ease bottlenecks in the system and even help ease some of the pain consumers have been feeling at the gas pump.

And while expanding and upgrading the nation's energy infrastructure is good for the industry, it has broader benefits as well, experts say.

"Infrastructure is not just essential to the nation's energy boom, but to the economy as a whole," Kiley says. "These types of assets are 'must-run' assets—a lot of things can't happen without energy delivery around the country and pipelines are a really big part of that."



Update (02/22/13): Quinn Kiley’s affiliation was clarified.