North American Oil & Gas Pipelines

SEP 2018

North American Oil & Gas Pipelines covers the news shaping the business of oil and gas pipeline construction and maintenance in North America, including pipeline installation methods, integrity management innovations and managerial strategies.

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Page 26 of 43

the Marcellus and SCOOP/STACK shale plays, as well as higher pipeline develop- ment costs for long-distance interstate pipelines, makes building a pipeline to the north less attractive. Too Much of a Good Thing? In other areas, anecdotal evidence indicates private equity money compet- ing against itself, causing the required returns to fall. Additionally, Appalachia provides a good example of how excess pipeline can develop in response to wide basis differentials. (McKinsey Energy Insights models indicate there is more pipeline capacity exiting Appalachia than production until after 2026.) Most of the proposed new pipelines linking the Permian to the Gulf Coast would be regulated as an intrastate (i.e., within Texas) pipeline and are generally easier to permit and build compared to interstate, or even northeastern in- terstate pipelines. Furthermore, private equity companies are increasingly at- tracted to stable pipeline revenues — es- pecially when those pipelines are in an energy-friendly state like Texas, where a pipeline can be expected to come online 12-18 months after FID. As a result, it is more likely in the long term that excess new pipeline capacity will be built from the Permian to the Gulf Coast rather than too little. LNG to Provide Added Demand Assuming there is sufficient pipeline capacity, high oil prices may not de- press prices in the Permian as much as expected. This is because a USD 10/bbl increase in oil price leads to an increase of about USD 1.20/mmbtu in oil-linked liquefied natural gas (LNG) — assuming a 12 percent slope — with no direct im- pact on Henry Hub-linked LNG prices. From 2020 to 2024, McKinsey expects about 2 Bcf/d of surplus capacity at U.S. LNG export terminals. If oil prices were to increase due to a decrease in Venezu- elan crude oil production or some other unforeseen shock, then oil-linked LNG contracts would become more expen- sive. Demand for U.S. LNG would be- come more price competitive and pro- vide an outlet for additional associated Permian gas. The Permian is in a unique position. High oil prices lead to additional gas production and put downward prices on in-basin gas prices. The Permian's gas problem can be divided into two phases. The first phase is from now until about 2020 where there is insuf- ficient pipeline capacity and in-basin prices are low. Despite building nearly 2 Bcf/d of additional pipeline capacity by 2020, additional capacity is needed. This leads to the second phase. Market fundamentals may attract too many pipelines, and the Permian is at risk of becoming over-piped. Jamie Brick is a specialist at McKinsey Energy Insights, which represents the analytical and business intelligence arm of the global management consulting firm McKinsey & Co.'s oil and gas practice. SEPTEMBER 2 018 | North American Oil & Gas Pipelines 27

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