Deloitte: US shale production boosts midstream growth

US production from unconventional oil and gas production is driving demand for midstream infrastructure, and more consolidation of midstream companies is likely, the Deloitte Center for Energy Solutions said in a report released Nov. 19 at the 2013 Deloitte Oil & Gas Conference in Houston.

Growing midstream infrastructure needs could require more than $200 billion in additional investment by 2035, Deloitte said.

The use of hydraulic fracturing and horizontal drilling pushed US production in 2012 to its highest level in 16 years. Consequently, producers need more pipelines, gathering systems, and processing plants.

During 2006-12, midstream companies invested almost twice the amount as they did during 1992-2006, Deloitte said in a report entitled "The rise of the midstream: Shale reinvigorates midstream growth." Yet despite this rise, producers in the Bakken formation of North Dakota and the South Texas Eagle Ford liquids play still need more midstream services.

The US Energy Information Administration estimates 35% of the Bakken natural gas production was flared or otherwise not marketed because of the insufficiency in the infrastructure required to store or transport it.

In the Eagle Ford, rail shipments are increasing for lack of enough pipelines to handle production volumes, much of which is now being moved by rail and truck.

Midstream companies growing

The largest US midstream company, Kinder Morgan, has an enterprise value of $110 billion, making it the third-largest energy company in North America, Deloitte said.

"The rise of the midstream sector is illustrated by the increase in its company valuations. Nearly 25 midstream companies have an enterprise value in excess of $5 billion, up from seven companies in 2006," said John England, vice-chairman and oil and gas leader for Deloitte LLP.

Shale plays are expected to keep the midstream demand momentum going over the next 10-20 years, Deloitte said.

Midstream companies depend heavily on external capital, Deloitte said. Since 2008, more than 95% of the midstream's capital expenditures and acquisitions have been financed through equity and debt.

Master limited partnerships plays a financial role for midstream companies.

"The MLP remains the bedrock of the midstream sector's capital structure, with 14 deals raising $4.9 billion through [initial public offerings] in 2012, the largest number of deals and the biggest proceeds in 3 years. That could change, though, if interest rates rise significantly," the report said.