In this month’s edition of the Pipeline Technology Podcast sponsored by Pipeline & Gas Journal, Jeff Awalt of P&GJ joins Russel Treat to discuss the latest developments with international pipeline construction at the mid-way point of 2021.
In this episode, you will learn about changes in pipeline construction in key global markets, what countries are driving demand for natural gas and crude, how governments and other macro factors are affecting the future outlook for pipeline construction, how to get out ahead of these macro factors, and other key topics for pipeline operators and midstream companies.
Pipeline Construction Outlook: Show Notes, Links, and Insider Terms
- Jeff Awalt is the Executive Editor of Pipeline & Gas Journal (PGJ). Connect with Jeff on LinkedIn.
- Pipeline & Gas Journal is the essential resource for technology, industry information, and analytical trends in the midstream oil and gas industry. For more information on how to become a subscriber, visit pgjonline.com/subscribe.
- Read Jeff’s August 2021 article, “Midyear International Outlook for Pipeline Construction.”
- Learn more about the Pipeline & Gas Journal Awards. A ceremony will be held on November 18, 2021, in Houston.
- Marcellus Shale is a rock formation that covers multiple U.S. states in the Northeast and Midwest region. According to the USGS, Marcellus contains approximately 84 trillion cubic feet of undiscovered, technically recoverable natural gas and 3.4 billion barrels of undiscovered, technically recoverable natural gas liquids.
- The Marcellus and Utica Shale Formation covers a large area of potential natural gas resources in New York, Pennsylvania, West Virginia, and Ohio.
- Permian Basin is a large oil and natural gas producing area in the Southwest U.S. that runs through West Texas into southeast New Mexico. The basin contains the Mid-Continent Oil Field province.
- Haynesville Shale is a large rock formation that runs through East Texas, Arkansas, and Louisiana. Haynesville contains vast quantities of recoverable natural gas a/k/a shale gas that is second to Marcellus in the U.S.
- Carbon Capture (CC) is the process of capturing waste carbon dioxide, transporting it to a storage site, and depositing it at a separate location where it will not enter the atmosphere.
- Cedigaz is a source of oil and gas surveys, data, and information used by gas analysts, international organizations such as the International Energy Agency (IEA), and the Organization of Petroleum Exporting Countries (OPEC) to support decision-making.
- International Energy Agency (IEA) works with countries around the world to shape energy policies to support global markets.
- Kinder Morgan Permian Pass is a proposed new natural gas pipeline in the Permian Basin that would transport natural gas from West Texas to interstate pipelines and LNG export terminals in Louisiana and East Texas.
- East Daley Capital specializes in identifying, understanding, and monitoring operational risk at the asset level and translating this information into financial risk.
- Atlantic Coast Pipeline (ACP) was a planned underground transmission line designed to transport natural gas from West Virginia to public utilities in the Mideast U.S. The pipeline project was canceled in July 2020.
- Dakota Access Pipeline (DAPL) (a/k/a Bakken pipeline) is an underground oil pipeline that runs from the shale oil fields in the Bakken formation in northwest North Dakota through South Dakota and Iowa into Illinois.
- Keystone Pipeline (KXL) is a large-scale pipeline system designed to transfer oil from Canada to Texas. The fourth phase of the project, Keystone XL, became a hot-button, divisive issue in 2015, which caused delays. The expansion was approved in 2017 by the Trump Administration. However, the project was set on the path to cancellation under the Biden Administration in early 2021. In June 2021, the Keystone XL Pipeline Project was terminated.
Pipeline Construction Outlook: Full Episode Transcript
Announcer: The Pipeline Technology Podcast, brought to you by Pipeline & Gas Journal, the decision-making resource for pipeline and midstream professionals. Now your host, Russel Treat.
Russel Treat: Welcome to the Pipeline Technology Podcast, episode 12. On this episode, our guest is Jeff Awalt, executive editor with Gulf Energy Information. We’re going to talk to Jeff about his article published in the August 2021 Pipeline & Gas Journal, which is the “Midyear International Outlook for Pipeline Construction.” Jeff, welcome to the Pipeline Technology Podcast.
Jeff Awalt: Hi, Russel. It’s great to be here.
Russel: Let’s start, if you would, with an introduction. Why don’t you tell us a little bit about who you are and your background and how you came to be writing for Pipeline & Gas Journal?
Jeff: Sure. I have been with the Pipeline & Gas Journal and Gulf Energy Information, its publisher, for about four years or so now, a little over four, maybe five years, getting close. My background has been primarily in oil and gas for the past lot of years. [laughs]
I started out in journalism with newspapers and was at the Associated Press. They moved me down to Houston from Dallas back in 1988 to cover the oil and gas industry here out of the Houston bureau.
From then on, I was doing a number of things in and around the energy industry, including corporate work and communications, investor communications, things of that nature, for mostly upstream services in the upstream side but as well as some midstream and just a touch of downstream over the years.
I’ve been around the oil and gas industry, around pipelines, and particularly around the activity here in Texas, where we’re based, for quite a long time. As part of that, I’ve been covering for quite a while — even before I got to Pipeline & Gas Journal — a lot of the international markets.
That has led to me taking the lead role when we’re doing our international roundups, looking at what’s going on primarily with construction activity with pipelines around the world but also just general coverage, tracking regional activity, and everything from LNG, gas, oil demand and consumption trends, and those kinds of things that are the drivers behind pipeline infrastructure expansion demand.
This midyear report is one of two that we do every year as a standing piece to keep people up-to-date on the international markets with pipeline construction activity. We do one in January that’s a look at how many miles of pipeline are under construction. It’s based on very intensive research and survey work and tapping into Gulf Energy’s data capabilities. That comes out in January.
Then in mid-year or rather August, a little past mid-year, but based on the data over the first half of the year or so, we come back in mid-year and give an update, which, on years like the ones we’ve had here recently, things can change quite a bit from one half of a year to the next.
Russel: I’m certain that’s true. You’ve spent your career, pretty much, as a writer press guy in a lot of different roles and a big part of it is around oil and gas?
Jeff: That’s correct, yes.
Russel: It’s interesting to me. I think when you have the ability to really take a deep dive into the kind of data that you work with — all the construction data, the demand data, and all that stuff from a worldwide perspective — you probably develop some opinions and insights that are unique.
I guess the first question I want to ask is just, how quickly are things changing around the worldwide market around pipelines related to the pandemic and all the uncertainty that’s coming from that?
Jeff: [laughs] It’s been some pretty significant change. You can look at it from a variety of ways. You can look at it in terms of capital spending or operating expenditures, OPEX, things of that nature. Also, in terms of how many projects are under construction or how many are planned.
We saw, for instance, in our January update where we are tracking mileage of pipeline activity regionally and globally, between 2020 and January 2021 — I guess really it would be December 2019 to December 2020 in our January report — we saw about a 36 percent decline in total pipeline miles that are either under construction or planned at that snapshot period of the year.
The bulk of that coming because, as you might expect, reduction in planned projects at various stages in the planning and engineering process for a variety of reasons, and those reasons do tend to vary regionally.
We do see some pretty substantial changes. If you look at what’s going on in terms of the markets and what’s behind that, we’re talking of such incredible volumes of things in terms of what is the demand outlook for Asia Pacific, or North America, or Western Europe, or whatever region you may want to take.
The demand outlook, you’re a lot of times talking in single-digit percentages for the most part. The same with production going up or down, but when it comes to what happens in the midstream and how it responds to that, you can see some pretty significant shifts going on in the level of activity.
Russel: I think it’s interesting. I’ll just ask for your perspective on this. This is longer term, but I can remember it’s probably been 15 years ago or so where I went to a big presentation by one of the investment banking companies. They were talking about, “We’re coming up on peak oil.”
Another 5 or 10 years behind that, it was like look at the shale revolution and what this is going to do. Then in 2018, the big conversation was takeaway capacity. The gas production is now in the Northeast versus the Gulf Coast because of the Marcellus and the Utica. Oil production is booming in the Permian, and we don’t have enough takeaway.
Here we are, and you’re telling me that we’re looking at 36 percent of the projects that have been canceled. Those are some mighty big swings. Those are some mighty big swings. [laughs]
Jeff: They are. You’re talking a lot about North America and the United States in particular with a lot of that. We have a number of unique challenges and issues and regional distinctions that go on, including the level of regulatory oversight and the level of oversight in terms of safety and methane management and everything.
You could go down the list that touches on the regulatory side that are priorities by the pipeline operating companies and everybody associated in the industry. That is not necessarily the level of activity you see like that in other regions of the world.
That does tend to make it harder to get from start to finish on a project. Of course, that’s been exacerbated by the anti-carbon activity that’s been going on.
Russel: No doubt. I wanted to hit some of the highlights. I read your article. It’s quite detailed, a lot of information there. I wanted to hit some of the highlights. One of the things I wanted to talk about was the worldwide LNG market.
This is another one of those markets that, I think, it’s been interesting in the last 20 years how that market has evolved. We were talking about having gas shortages, so people started building LNG plants to gasify, take LNG and gasify it and feed it into the U.S. market.
Then we had the shale boom, and everybody’s building plants or turning plants around to liquefy and export. What’s going on now with the LNG market worldwide?
Jeff: It has been recovering. Natural gas, first of all, did not get hit as hard as oil in terms of the pandemic downturn. LNG has maintained a level of demand a little above, I think, where a lot of people thought it would.
If we’re looking longer term, if we’re looking where we are now to over the next few years where we and a lot of the analysts who are tracking the industry go, we see LNG as a major driver with natural gas demand. It’s changed the landscape.
Until LNG really developed into an economic product for global distribution, natural gas was a regional product. We’ve seen over the past decade that it has become increasingly international. We have markets that have developed into major producers and into major consumers of LNG.
As you’d mentioned, North America, the United States in particular, had the LNG infrastructure that was built up early on. It was focused on importing. In addition to the expansion with additional capacity and new LNG liquefaction capabilities and export facilities, there’s also been a conversion of old, previously import facilities into export facilities. It’s been a big shift.
Australia is a major producer. Both the U.S. and Australia are depending on Asia Pacific as a major market with a growing demand for natural gas, particularly in China and India, and the United States is also battling for market share with natural gas with LNG exports to Europe in competition with mostly Russian gas coming in by pipeline. LNG is the significant driver and will remain such. It has helped hold the market.
Russel: From a carbon perspective, it’s way more attractive than coal or fuel oil. It certainly has some play from that standpoint. Is it presently cost competitive to coal and fuel oil from a power generation standpoint?
Jeff: It depends on where you are and what sort of carbon taxes may be applied and all sorts of other things. It’s certainly cost competitive in Europe where there’s significant environmental regulation at play.
It is less competitive in areas like, particularly, Southeast Asia, the developing regions of Asia Pacific, which we do include as far as the natural gas infrastructure of China and India as developing in that sense. I’m talking more along the lines of the Southeast Asian countries. Even in those areas such as China, in particular, you see a lot of effort now. At least, you hear that there is a lot of effort now to transition to cleaner fuels because they were so oil and particularly coal-heavy.
Southeast Asia has so much coal available at low cost that it’s going to be a while for it to be competitive there, but it is still growing in those regions.
Russel: Interesting. I guess the other question that I wanted to ask is — given what I know about LNG — there seems to be a competition to see who gets to be the first people to get plants built. There’s a dynamic certainly in the U.S. around that reality, and then there’s another dynamic internationally around that reality. Do you think we’re going to continue to see a lot of projects, or is it looking like those projects are going to slow down?
Jeff: That’s one of the million dollar questions. There are still going to be projects. It is going to be slower as far as LNG facilities, I think. Anything you might categorize as being somewhere in the midstream is going to be struggling its way out of the current state for over the next, at least, five years or so.
At least, that’s what most of the models indicate. One of the ways to look at it is it’s not just a matter of the specific LNG facilities but of the infrastructure around it. For instance, you’re going to see more of a slow down overall in an area like North America, the United States than you’re going to see in places where national governments are committed to expanding infrastructure.
India is a great example. India has a stated goal of significantly expanding its domestic natural gas infrastructure. They’ve got pipelines building all over the country, and then in addition to that, they have the distribution systems that are building all over the country. It is going to be a multi-year, ongoing activity that it’s going to drive a lot of construction and a lot of capital spending in that area.
You see the same sort of thing going on in China where they’re not only importing, but they’re also developing their own gas production, expanding their own gas production, and tapping into some of their domestic reserves that they’ve uncovered there. All of that is going to be driving, but elsewhere you’re seeing a slowdown overall.
Russel: Right. I think it’s really interesting, too, when you start talking about India in particular. It’s such a wide-open market. It’s an interesting place, and it’s not talked about a whole lot.
Jeff: I believe Cedigaz, which is the Paris-based group — I was visiting with them; it’s been a couple of years now — I think their overall long-term perspective hasn’t shifted very much. Their expectation has been that by about 2035, demand in India for natural is going to exceed it in China.
China’s still on a pretty fast growth rate. In India, the current leader of that country is intending to get a significant amount of infrastructure built before his term ends. Every time they’ve come out and talked about their plans, it’s only gotten bigger rather than smaller. India, relatively speaking with the rest of the world, is going to be a huge market in terms of natural gas demand growth, midstream infrastructure growth — and that includes LNG imports, which they have going already in place and growing along both coasts of India.
Russel: Let’s talk a little bit about what’s going on in North America. What’s going on in midstream in the Permian? I tend to be more at the micro level. I think you’re probably more at the macro level. I’m curious to hear your take on that.
Jeff: That’s interesting because I’m actually right now working on an update on Permian, and I’m talking to people about that very thing. I’ll tell you it’s not the best time to be in the midstream in the Permian.
It’s had a pretty big hit. I’ll give you an example just because it’s fresh on my mind with recent conversations. The Permian, you look at it really from, first of all, oil, and secondly gas. You have to separate those two in terms of conversation about midstream.
The oil takeaway capacity from the midstream, primarily the Gulf Coast to a lesser degree up to Cushing in Oklahoma, was about to be overrun by production. It was getting close enough that the tariffs were rising up into the $3-4 range before the pandemic.
That has now declined to less than a dollar, so we’re substantially below those tariff rates when the takeaway capacity was getting very tight. That’s, of course, a direct reflection of the production levels that are going on there.
I’ve tended to look at the Permian in reverse. I’ve looked at it in terms of excess capacity where oil is concerned, how much room do you have in the pipe, so to speak, particularly from the Permian to the Gulf Coast, which as an aside, the demand was created when the United States abandoned a no export rule, so to speak, and started allowing oil exports.
There was a surge along with the demand in the production capabilities and the efficiency of the drilling and production going on in the Permian. As I said, it was getting awfully tight, but the excess capacity coming out of the Permian was probably maybe close to 2 million barrels a day, maybe 1.75 million barrels a day, somewhere in that range, pre-pandemic.
About 800,000 of that was going to the Gulf Coast. The excess capacity coming out of the Permian by pipe now instead of under two million barrels a day, it’s now close to four million barrels a day in excess capacity.
It’s nearly three million barrels a day excess capacity from the Permian to the Gulf. It was a couple of things. A lot of projects were underway, and a lot of projects finished up 2019, 2020 that were adding capacity in response to that demand.
You had more capacity come in just as COVID came in, and everything just went by the wayside. There’s been a lot of readjustment going on with that. We’ve seen, as I was talking about earlier, substantial reductions in capital spending that are going on in the Permian for midstream.
Russel: It’s fascinating to me. Again, it’s not been that long ago that there were all these conferences going on and all this conversation about increasing Permian takeaway capacity. We were getting to the point where Cushing was running out of storage, that the people were putting crude into pipe simply as a way to store it.
We were waiting for these things to be open, and then COVID. Now, what’d you say, three million barrels a day of excess takeaway capacity from the Permian to the Gulf Coast? That’s a big number. [laughs]
Jeff: It’s actually pretty close to four. I think it’s 3.8 million or somewhere in that range. On the gas side, on the other hand, it’s down. There’s excess capacity in the gas lines there.
I’m sure you know there’s so much associated with gas in the Permian that’s coming up with the crude oil production that there’s been a significant amount of flaring that’s had to be done over the years there.
There’ve been a number of natural gas pipelines that have come in with Kinder Morgan in the forefront, putting those online with good timing. You’ve got a couple of billion cubic feet a day in excess natural gas capacity out of the Permian right now.
As I mentioned, Kinder, they had a project called Permian Pass, I believe, that they put the brakes on. They haven’t canceled it. They’ve just said that the market’s not right for it right now, but they have projected that the market may be ready for an additional major natural gas line coming out of the Permian by about mid-decade, four or five years or so.
I had a conversation with some analysts at East Daley Capital last week out of Denver. They’ve been tracking that and they concur with that outlook based on what they know right now. The outlook for gas coming out of the Permian and the outlook for midstream construction-related activity for gas is a little brighter than it is for crude, at least, for the foreseeable future.
By the way, we were talking about LNG where we are continuing to see some efforts toward some additional natural gas capacity over around Haynesville and with natural gas coming into that Louisiana and Sabine Pass area to fuel the LNG facilities that have expanded around there.
That Permian Pass pipeline that Kinder was looking at, in theory, mid-decade or so, is going to be moving over toward that direction rather than straight down to the Gulf Coast and some of the facilities down there if it stays on track with some of the original thinking. LNG, again, is a driver in the midstream activity.
Russel: Let’s talk a little bit about crude oil and what’s going on internationally with crude oil. I guess one of my takeaways from our conversation so far is that there’s more activity around gas in general than there is around crude, but I know there’s also some major activity going on in some places around crude. Can you lead us through what’s going on internationally around crude projects?
Jeff: First of all, you’re right. New installations for gas infrastructure account for about 65-70 percent of the total spending that is expected between now and 2025 worldwide, which also tells you that even though it’s less, there’s [laughs] still oil infrastructure that’s being built.
Oil demand in 2020 saw its biggest annual decline in history. The rebound in 2021 has been softened. A lot of it is the sluggish aviation sector based on the IEA, the International Energy Agency, which does a global energy review that I think came out in April.
Russel: I would expect you’re going to see a very big difference when they put their next update out.
Jeff: [laughs] Yeah, I’m thinking.
Russel: Just my personal experience is I didn’t travel. I historically have traveled every week or two pretty much for most of my career. I did not travel at all for 2019 and for the first four or five months of 2020.
Here, six, eight weeks ago, I made my first trip. When I made my first trip, the airports were still empty and the airplanes were still empty. But, boy, the last couple that I’ve made, the airports are back to normal except that everybody is wearing a mask. They’re jam-packed full of people.
I think you’re going to see a big rebound in aviation fuel in the second half of this year. I don’t know if it’ll be sustained past the summer, but people are just not willing to stay cooped up forever.
Jeff: We’ve got this Delta variant that some people are fretting over. I guess what I would say is I tend to have a little more optimistic expectations than some other people, and it’s partly hearing things like that. [laughs] There are still some downside risks that are hanging out there, and that’s one of them.
If you look again, if you’re talking oil, China is the only major economy where oil demand in 2020 was higher than it was in 2019. It’s expected to be up about 9 or 10 percent this year over what it was in 2019 or so.
To a certain degree, I think you can look at China as, at least I hope, somewhat indicative of what’s happening elsewhere because they shut down early, and then they re-opened pretty early compared to a lot of other places.
We’re seeing growth there, but, of course, China is somewhat unique in that they have so much demand going on related to fuel switching and power generation and things of that nature. Power generation, I don’t think we’ve talked about. Power generation is a big driver on the gas side.
Oil demand in the U.S. — from what I’ve seen, we’re expecting it to stay at maybe a million barrels a day under 2019 if we’re looking at for the year of 2021, and that’s taking into account that you had some heavier pandemic-related restrictions early in the year and balancing out over the course of the year with improvement now through December.
The European demand is still low. They’ve had more continued lockdowns going on that have affected the 2021 totals more than a lot of other regions. India has had a really significant upturn in their COVID cases during the course of this year. They’ve had a pretty rough time. They’ve had a lot of lockdowns associated with that.
If you’re talking good news, my take on that is that it’s all short-term. We’re not about to leap forward with huge gains but there’s no reason to expect we have a long-term depressed market going on in terms of capital spending and other activity. There is expected to be globally an increase in capital spending by some this year.
It’s going to be flat in North America at best between now and next year, but we do think there’s going to be some upturn in 2022 spending including in the Permian, but nobody’s starting any major new projects.
The activity that’s going on now, particularly with pipelines, things of that nature are projects that were already started before the pandemic came along. I do think there’s reason for optimism, and I think what you’ve experienced with full airplanes is as good an indicator as any.
Russel: It’s notional. [laughs] This is very much not related to the analysis you do, Jeff, but I remember at one time I used to fly Southwest a lot. I developed a not very sophisticated buy-sell hold signal. The hold signal was, if you got on a plane, and the middle seats were empty, but the other seats were full. The buy signal was no middle seats, and the sell signal was lots of empty rows.
That served me pretty well. I don’t think that works anymore, but I think they’ve gotten a lot better about being flexible around their schedules and such. It is interesting how those notional things do tend to be indicators at some level.
Jeff: I’m not sure if I would call it notional, but there are some other things creeping around the edges of our industry that add some downside risk. One of them is increasing momentum with the energy transition, particularly in the Western Hemisphere, North America, and Europe.
There’s some risk with the reduced interest from the financial sector lenders to project finance fossil fuel projects. All of that got a lot of momentum with the pandemic. Everything’s shut down, and people started getting daily news reports about how the carbon output has dropped. There became a little bit of a Xanadu thing going on where people thought, “Okay, we’ve now made an energy transition,” in the minds, I think, of a lot of people outside the industry.
A lot of people outside the industry are the ones that have caused a lot of trouble when we see things like the Atlantic Coast Pipeline being abandoned after years of cost increases, or with Dakota Access having to fight for its continued operation, or Keystone XL going down on the first day of a new presidential administration. There are things that are nipping at the edges that are worrisome. They’re not going to hold the industry down. I don’t think, but they are going to add pressure for any kind of projects and expansion that may be going on.
Russel: Certainly, that’s true, and certainly, that’s going to have near term effect, but to my degree, this reminds me a little bit about some of the things that were going on in the ’70s. They had the huge natural gas shortages during some really cold winters in the ’70s.
That was not anything. It was all about how the industry was regulated. You talk about Atlantic Coast and some of the pipeline projects in the Northeast. You start having some really cold winters, and people can’t get natural gas to heat their homes. That’s going to have an impact.
Jeff: Yes. On the other hand, you have places like California where you have local initiatives to block the installation of natural gas in any new construction. [laughs] There’s spots.
Russel: I guess the point I’m making — and again, this is not scientifically based or analysis based, it’s more opinion — is that there are some things that potential upsets. If demand outstrips the ability to do supply, like what we had in Texas this last winter, you might be able to get past that once.
But if it happens twice, then political winds will change, and that causes other drivers to change. I guess what I’m driving at here is it’ll be good to continue to watch these twice a year updates and look for what are those macro trends, and how do you get in front of them?
Jeff: I think it is a stay-tuned situation. There are big shifts, as we talked about earlier, going on over periods of months. What we were saying, based on the available best information at the start of 2020, is not at all what 2020 was. There’s always room for surprise in the energy business. [laughs]
Russel: Oh, yeah. Boy, you’re preaching to the converted on that one. I think that’s a great place to wind this up, that this is the outlook, subject to change.
Jeff: I think so. Well, let me just mention a little bit of a bright note, at least, that if you look on the pipeline side, we saw about a 28 percent decline worldwide in capital expenditures related to pipeline expansions, installations from 2019 to 2020. We’re now looking at that to be up a good 10 percent from 2020 this year, and it’s going to hold steady worldwide. We’re going to see some pockets of growth. Eventually, the producers are going to start producing again. It’s going to have to go somewhere, and they’re going to need a way to get it there.
Russel: Right. Well, hey, Jeff, thanks so much for coming on. I really appreciate the insight, and I very much enjoyed the conversation, so thank you very much.
Jeff: It’s my pleasure.
Russel: I hope you enjoyed this month’s episode of the Pipeline Technology Podcast and our conversation with Jeff. I want to point something out that you may not be aware of. The editors of the Pipeline & Gas Journal are thrilled to announce their inaugural Pipeline & Gas Journal Awards.
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Transcription by CastingWords