Friday, July 4, 2014

The Crazy Economics and Infrastructure of the Global Energy Industry

Fortune, describing how Kinder Morgan transports condensate from the Eagle Ford play:
The challenge is in getting this light oil, known as condensate, to market. The local refineries can’t use it all because many of the facilities in and around Houston are built to run heavier crude. So finding new outlets has created something of a reverse scavenger hunt. Kinder Morgan’s part of the solution illustrates the reach of its distribution system and the value added when all of the company’s far-flung parts work together. First, the company spent $220 million to convert a redundant El Paso gas pipeline to run oil back to terminals along the Houston Ship Channel, among other places. Eventually, much of the condensate will go to a low-end refinery, known as a splitter, that Kinder is building on BP’s behalf at a cost of $360 million. That will turn the oil to low-sulfur diesel and other products, with an eye toward export markets.
Much of the rest will head north — way north. First it will move to Kankakee, Ill., joining a propane line that Kinder Morgan ran out of Canada. That business is being abandoned because U.S. propane production has boomed. (We can now grill with American pride.) Kinder Morgan will spend $310 million to convert that line to run the Eagle Ford condensate north to Edmonton, Alberta. There, the oil will be used to thin out the viscous Canadian crude that is extracted from the Alberta sand mines. Some of that blended oil will move through Kinder Morgan’s Canadian pipeline to ports in British Columbia for export to Asia and West Coast markets. And if the Keystone XL pipeline is ever built, there’s a good chance that the condensate-Canadian blend will wind up back in Texas, where refineries are eager to get their hands on more of the Canadian crude. It’s a 5,200-mile roundtrip — i.e., one big toll road.
That is just crazy.  I really don't understand the economics of energy.  Also, I've questioned the lack of investment in pipelines to transport gas from the Bakken play, but it's obvious that Kinder Morgan is putting their money into infrastructure to deal with the shale boom:
In the ship channel alone, Kinder Morgan is spending $1.5 billion on terminals and related improvements. The crown jewel is a $500 million terminal for black oil and other residuals, built as a joint venture with TransMontaigne Partners TLP , an operator of oil and gas terminals that is controlled through Morgan Stanley MS 0.40% . But the expenditure goes beyond oil and gas and also includes bulked-up terminals for exporting coal and petcoke, the ├╝ber-polluting leavings from oil refining. Global demand for both, particularly coal, is up, a development that has been a bright spot for U.S. coal companies as utilities keep shifting to natural gas. Kinder Morgan isn’t investing just on land; its newest pipeline essentially moves on water. Late last year it spent $962 million to buy five tankers, each capable of carrying 330,000 barrels of oil.
The build-out is enormous, and not just for Kinder Morgan. The Interstate Natural Gas Association of America said in a report this year that U.S. companies need to build more than $600 billion of pipeline, storage, and related equipment during the next 20 years. Much of the construction radiates from the Marcellus, centered in Pennsylvania and West Virginia. There is the need to build more gas lines north and east into New England, where this winter’s brutal cold sent prices soaring on the spot market. But there are also more gas and gas liquids coming from the Marcellus than the local markets can use. The result is a dance between producers and the pipeline companies over the terms to ship the fuel back to the Gulf and the gas-hungry petrochemical industry.
 The article does mention how hard it is to plan where the pipelines should go, because the energy market is in such a state of flux.  Remember all the LNG import terminals which were being planned and constructed just a few years ago?  Kinder Morgan may end up fine, but there will be defaults in the energy sector when the boom goes bust.

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