North America’s oil and gas pipeline boom could signal meltdown

A report published by Global Energy Monitor cautions that upbeat building spree of US oil and gas pipeline systems may stand on a frail financial fundament, which could see previous turmoil return while bearing considerable risk for investors’ rate-of-return as climate-change consciousness and regulation is expected to increase pressure on fossil fuels. 

North American overexpansion of oil and gas systems would bear “high leverage and unrealistic expectations”, the authors of the report say, warning that signs of increased risk are looming on the horizon of the present building boom systems. 

The pace of the global pipeline building is stated to have tripled since 1996. The US is one of the most aggressive builders of oil and gas pipelines systems and its pace appears unprecedented: worldwide it owns 51.5 per cent of all projects in pre-construction or construction stages. 

The report argues that investors in the booming expansion of oil and gas infrastructure would steer for a similar shock (as experienced some years earlier in the coal mining sector) as “boom-fueled optimism runs into climate realities and fiscal limits”. 

Ted Nace, co-author of the report and executive director at Global Energy Monitor points out that “enthusiasm [is] spilling out of the fracking boom [and] has fostered unrealistic expectations of expansion in midstream oil and gas infrastructure. Investors are setting themselves up for disappointment”. 

One reason experts are so worried is that the previous shock would carry much weight pointing towards signs for imminent turmoil within a similar-functioning emergy market than coal mining: “The combination of high leverage and expectations for growth based on ever-increasing Asian demand set the stage for investor disappointment and losses”.

In the context of the previous crisis “[it] is not just hypothetical: it is exactly the combination of elements that created the coal mining meltdown of 2008 to 2014”. 

Three areas would be particularly vulnerable in the US to present pipeline expansion concentration, including ‘Permian Basin of Texas and New Mexico’, ‘the Marcellus and Utica shale formations in Appalachia and the Midwest’, and the ‘Canadian tar sands of Alberta’. The decision by the Canadian government last year, to commit C$5bn (£2.9bn) to acquire the Trans Mountain Pipeline would add extra fuel to the fire. 

According to data from Oilwire.org, the global building funnel for gas pipeline systems - that are non-operational and either bearing the status ‘under construction', 'mothballed', 'proposed', 'retired' or 'shelved', the US is found to account for 38 per cent of projects counted. Even greater is the number of US oil projects where the US nearly owns half (47 per cent). 

Despite the US upbeat investment sentiment in its own oil and gas infrastructure – the report found that $232.5bn (£180.5bn), or 37 per cent of total estimated investments in pipelines under development, is for pipelines in North America – shifting sentiment towards cleaner options that will benefit environmentally could hurt the calculations of investors.

More US citizens understood the perils of climate change, according to a January poll conducted by Yale University and George Mason University, suggesting that 69 per cent of American respondents said they are “worried” about climate change while 29 per cent were found to be “very worried” – for the latter, representing an eight per cent increase since April 2018. 

Another point of concern is that - as sentiment changes and increasing legal barriers spring up (such as a 2016 the Obama Administration ruling that demands for more scrutiny for pipelines' impact on climate change) - the world for which many North American pipelines are being built for today may no longer exist by the time they are completed. 

At present, US impact studies for oil and gas pipelines on climate change are still found to be rather lax and lenient. When a study found that the proposed Sabal Trail pipeline from Alabama to Florida would increase Florida’s rate of greenhouse gas emissions by between 3.6 per cent and 9.9 per cent, US Federal Energy Regulatory Commission approved the project on the grounds that such an increase was not significant. The report argues that this and similar projects could soon be revisited and might face tougher regulation under new regimes as pressure on oil and gas increases.

Interview with Ted Nace, co-author of the report

E&T: Why are the signs (and the effect) of a potential ‘oil and gas pipeline equity crash’ so substantial and why is America’s short term outlook so misleading?

Ted Nace: The underlying paradigm is the problem here. Infrastructure has typically been seen as a relatively safe investment, and the narrative of ‘China growth’ has fooled investors before. But the energy landscape is shifting radically, and today’s pipelines will likely be rendered obsolete long before their 40 to 50-year lifespan.

The oil and gas industry is shaped by the familiar patterns of the boom/bust cycles that characterise extraction. It’s easy to shift drilling rigs in and out of deployment. But midstream infrastructure is fundamentally different. Investments are for 40 to 50 years. The industry does not seem to realise how quickly the landscape is shifting as costs for renewables and storage fall very rapidly.

E&T: What are the demands from your side to stop US oil and gas system ‘overexpanding’?

Nace: We are not an advocacy organisation, just data gatherers and analysts. But there is no doubt that a growing movement is demanding that institutional investors filter oil and gas out of their portfolios. Stigmatisation of fossil fuels is something that needs to be factored into long-term investment decisions.

E&T: What are the hopes on the effects your analysis should have?

Nace: We’re hoping that our data will cause institutional investors to think twice before committing to long-term investments on infrastructure that may be rendered obsolete long before its lifespan of 40 to 50 years is over.

E&T: Can you quickly draw the connection between the negative effects of an expanding North American oil and gas pipeline building sector and risks on climate change?

Nace: The IPCC has made it clear that emissions in the oil and gas sector need to level out quickly and significantly decline in the next decade. That is incompatible with investments in more oil and gas infrastructure.

E&T: What do you recommend the Trump or future US administrations should do?

Nace: The Trump and future US administrations need to understand that the climate crisis is a fundamental security risk and treat it on par with other such existential issues facing the US. The financial interests of the oil and gas industry cannot be allowed to outweigh the health and safety of the American people.