An Industry on the Rise: Pipeline Experts Provide Market Outlook
It’s no secret that the oil and gas pipeline sector has seen strong growth over the last year, after a period of downturn. Exploration and production (E&P) in North America is nearing record highs, and higher global oil prices have led to capital expenditure (CAPEX) increases among infrastructure owners and operators.
However, the pipeline industry does face some challenges, related to workforce shortages, political uncertainty and third-party opposition.
To provide a more holistic understanding of these challenges and the impacts of the administrations of U.S. President Donald Trump and Canadian Prime Minister Justin Trudeau on the pipeline sector, I spoke to Andrew Craig, TransCanada; Mike Dearing, vice president, North America sales for PipeLine Machinery International; Robert Osborn, senior vice president of pipeline operations for Michels Pipeline Construction, a division of Michels Corp.; Rob Riess, 2018 PLCA president and vice president of the pipeline division at Henkels & McCoy; and Neil Waugh, senior vice president at NPL Canada Ltd.
What is the status of the oil and gas pipeline industry in North America? Is it on the rise, declining or flat?
Craig: Mid-2018 we find the industry in a strong position, with now established technologies allowing for the economic development of new resource in areas not previously (or adequately) served by pipeline transmission combined with stable and increasing energy demand.
Dearing: It’s still on the rise for next couple of years, especially if the jobs anticipated in Canada are approved. Quite a few projects also are starting in the Northeast United States and Texas, in the Permian Basin, approximately for the third or fourth quarter this year and into 2019.
Osborn: The gas and oil industry from a construction perspective is building at an all-time high. Buildout of the shale plays continue, along with replacement of other critical infrastructure. I see new pipeline buildouts continuing for a few more years before starting to decline. I also see a continuation of the current buildout on our current infrastructure remaining strong.
The U.S. rig count is forecast to increase steadily throughout 2018. With the oil and gas industry capital spending for E&P in the U.S. increasing this year, we anticipate additional pipeline capacity will be required. We expect natural gas systems will make up most of the work, with a few large diameter liquids pipelines. We believe 2018 and 2019 will quite possibly be the peak years of this decade for pipeline construction.
Canada E&P investments are expected to remain nearly the same as 2017, which was a large increase over 2016.
Waugh: Mainline pipeline growth has been hampered by lack of coastal exit points for Canadian resources. Canadian pipeline activity has been slowly increasing over the past couple of years. The expectation is that this trend will continue as long awaited major projects become increasingly active in 2018 and beyond.
Riess: Definitely rising. Our projections show that 2018 will be the best year the pipeline industry has experienced since we started keeping records as a union organization through the PLCA. Previously, the three most labor-intensive years were 1966, 2008 and 2017, which together exceeded 12 million manhours according to the United Association. Our measuring stick, if you will, is the tracking of welders’ manhours. Judging by big projects in the Northeast and others around the country, we expect to exceed 13 million manhours this year. That said, 2019-2020 may prove to be a bit of a bouncing ball. The major expansion projects in the Northeast, like the Atlantic Coast Pipeline (ACP), NEXUS, Mountaineer XPress (MXP), Mountain Valley Pipeline (MVP) and Atlantic Sunrise, will all fall off the horizon by then. Only with a crystal ball could we know what will be going on with Keystone XL. I see the industry changing after the next couple of years, from huge expansion projects to performing system upgrades, maintenance and sustaining pipeline integrity.
Is one area doing better than another, such as transmission vs. distribution? Why so?
Dearing: Transmission, with a lot of large pipelines that are delivering gas to other regions of the U.S.
Osborn: Transmission and distribution are equally busy for Michels right now. Both sides of the business seem to complement each other very well. Both sides of the business still have replacement work to do in order to keep up with demand and regulations.
Waugh: In the Canadian arena, both distribution and transmission sectors are active and operating at all-time peak levels. Project delays and cancellations obviously impact transmission pipeline activities, but work on Enbridge Line 3 Replacement (L3R), infrastructure build to support Keystone XL, Trans Mountain (TMX) and Coastal Gas projects and work on a number of smaller projects including looping and integrity digs has the mainline contractors’ focus. Distribution projects, tied to residential expansions, and further expansion of the existing distribution systems, supported by government funding, are being fully resourced by the distribution contractors. These activities tend to be fairly consistent with little cyclicality.
Riess: The transmission side of the industry is booming due to production from the Marcellus and Utica shales plays. To be fair, the current Administration is to thank for getting projects up and moving. Stalled projects from as far back as 2015 are only building now in 2018. I believe that once the current projects are in the ground, there’s going to be a slowdown in expansion projects. I foresee plenty of work also on the distribution side of the industry, reinforcing aging infrastructure sorely in need of upgrades and restoration.
What has had the biggest impact on these current trends in the market?
Craig: New technologies such as hydraulic fracturing and directional drilling have allowed incredible amounts of additional oil and gas resource to be developed. It’s not just the massive quantity but also the location of the new resource that has resulted in a “replumbing” of the nation’s pipeline infrastructure. This began by reversing, looping and adding compression to many pipelines, but eventually the low hanging cheap expandability was picked and we had to add significant greenfield pipeline infrastructure.
Dearing: One, would be hauling the shale play gas to other markets.
Osborn: Other than population growth, our aging infrastructure is one of the drivers for distribution. For pipelines, the shale plays have required new pipelines to get the product to market. The exporting of LNG has spurred several large diameter pipelines.
Waugh: From an economics point of view, the oil and natural gas prices are a key impactor for our industry. Higher prices instill expansion confidence and generate more CAPEX dollars for the pipeline owners.
From the industry standpoint, the biggest challenges include pipeline permitting uncertainties, anti-pipeline sentiments and lack of clear national energy policy.
Riess: Two factors come to mind that have been particularly impactful. The pipeline industry has benefited from a pro-energy, pro-business Administration that has been remarkably effective in getting projects approved from FERC and moving the ball forward. This ‘force’ freed up a lot of projects, either in FERC or local permitting agencies, resulting in successful completions. The second factor is supply and demand. A demand we can meet especially with all the stored gas in the Marcellus and Utica. Previously, there were no deliveries being made because there was not enough takeaway capacity to get it to market.
What is the biggest challenge facing the pipeline industry today and how do you address it?
Craig: Regulatory uncertainty and environmental opposition. The fact is that pipelines are the safest way to reliably deliver the energy our society depends on and the standard of living to which we’ve grown accustomed. And it’s incumbent on us to educate all stakeholders, including federal, state and locally elected officials as well as landowners, indigenous tribes and affected communities about the importance of domestically produced, clean burning natural gas to both our present and future.
Dearing: It’s a combination of politics, environmental impacts and landowner issues. Educating people on the benefits and safety of pipelines should definitely be a priority.
Osborn: The biggest challenge we face in today’s pipeline industry is the workforce. As the baby boomers are retiring out of the business, we now have a shortage of qualified people in the industry. The traditional pipeliner is becoming a dying breed. The younger generation doesn’t have the same interests as the older generations had when it comes to long hours, travel and physical labor. The wages and benefits in pipeline construction are better than they have ever been, yet drawing new people into the industry remains a big challenge. Therefore, industry associations like the PLCA, DCA and INGAA have put committees together to strategize on how we can attract and retain young talent to serve the future of the pipeline industry.
Waugh: One of the biggest challenges facing our industry is the misinformation that led some to adopt an anti-pipeline stance. To overcome these sentiments or feelings, our group engages with politicians, Indigenous Peoples and other key stakeholders to educate with facts that detail the considerable socio-economic and environmental benefits from transporting Canadian resources via pipelines.
Riess: The biggest challenges have been the state and local permitting agencies, as well as activist group pushback. The gas companies are apprehensive of regulators now, and dread dealing with protestors at jobsites. With this new set of challenges that our industry has never faced before, it’s causing our clients, the gas companies, to do business in a different way than ever before. Complicating matters further is the unpredictability of the regulatory side of the industry.
How has the current political landscape impacted pipeline construction?
Craig: The political landscape is mixed. We have an administration that’s very supportive of domestic energy production and associated infrastructure but, on the other hand, we have individual groups, courts and states that are becoming quite effective in delaying an already robust regulatory review process.
Dearing: In a positive way, more jobs have been released and approved.
Osborn: First of all, the Trump administration filled the vacant seats at FERC. This was critical in breaking the logjam of projects that had been applied for. There is no question that the Trump administration has helped jumpstart the major projects that were held up during and as a result of the Obama administration. The new administration’s efforts help streamline the cumbersome regulatory process and provide necessary relief to the gas and oil companies.
Waugh: Focusing only on the Canadian landscape, the Trudeau government has recently supported two major projects (TMX and L3R) while rejecting a third (Northern Gateway). These two projects represent approximately 2,000 km (1,200 miles) of large diameter transmission lines work over the near term.
However, there is a significant challenge associated with the significant uncertain regulatory process that owners must navigate to ultimately get a pipeline approved.
As well, challenges exist at the provincial level of government whereby some provinces are pro-pipeline and others are not. With the lack of strong federal intervention projects become frozen in provincial standoffs.
Riess: I think this Administration has impacted the industry in a positive way as discussed previously. Unfortunately, it has also provoked huge public opposition, permit restrictions, and environmental monitoring. For all the good that our industry gained of projects being released, it has also been challenged by those opposed to the industry who are deeply motivated to protest and interfere with projects.
There has been a sense that industry stakeholders are looking to get as much work completed before the 2020 U.S. Presidential Elections. Is that true? If so why?
Craig: I can’t comment on individual companies and organizations but we are in the middle of robust near, medium and long-term growth at TransCanada. Our project backlog extends well past 2020 to ensure we are meeting the needs of our current and future customers.
Dearing: True, simply because there is uncertainty on who the next president will be and their stance on pipeline construction.
Osborn: There is certainly a lot of conversation about this. If Trump is not elected for a second term in the White House, the thought is that the next administration will try to reverse any of the positive legislation that the Republicans passed and supported by doing the opposite.
Riess: I’ve heard the same chatter in the industry. As long as the current Administration is in office, we can expect more projects to be permitted and built. There is a lot of concern that a change in political party after the next election would result in an Administration against fossil fuel production and in favor of more renewable sources.
What impact do the newly established U.S. steel tariffs have on your business?
Craig: TBD, they’re still working out many of the details.
Osborn: The U.S. steel tariffs definitely will have an impact on our business from material costs, the ability to get them in a timely fashion and also with today’s demand for construction equipment. This will drive up equipment costs and the ability to get it in a timely fashion. At the end of the day, it will drive costs up which, at some point, will hit all consumers by increasing the cost of oil and natural gas.
Throughout U.S. history, tariffs have often surprised us with unanticipated results and responses from the affected countries. As for the oil and gas industry, most of the steel for large diameter pipe comes from outside the U.S. We just do not make an adequate amount of it here in the quantities and metallurgies necessary to fulfill the upcoming/scheduled projects.
Waugh: Pipeline contractors are likely to see increased costs for new construction machinery. Pipeline owners generally purchase the required steel pipe and free-issue to their contractors. As a result, any increased steel pipe costs do not directly affect the contractors. However, they will potentially add additional project costs.
Riess: Certainly, the tariffs will have an impact on our business, especially if a pipeline operator decides not to build a project due to the cost of tariffs. But I would be surprised if this were the case. The jobs that are going on now have all been grandfathered in. The impact of the steel tariffs will be felt, not so much in the manufacturing of the pipe, but in the purchase of plate steel to make the pipe. I expect the gas companies to price that into the work going forward. All in all, in forums I have participated in, the level of concern in the pipeline industry for the tariffs remain low.
What regulatory challenges face the pipeline industry?
Osborn: We must continue trying to streamline the permitting process. The uncertainty of the regulatory process continues to drive up project costs for owner companies and contractors, which ultimately will drive up consumer costs.
Waugh: Traditionally, the Canadian National Energy Board (NEB) was the regulatory authority for most of the major pipeline construction projects in Canada. Pipeline owner companies needed to develop construction and long-term stewardship plans to gain the NEB’s approval. Earlier this year, the federal government proposed changes in the form of the Canadian Energy Regulator Act. If approved and enacted, there will no doubt be a different set of regulatory issues for our industry. We will need to stay tuned on this front and evaluated once approval and enactment of new regulations.
Riess: By far it’s the permitting. Previously, a decent sized project would have taken 12 months to be permitted, now it takes twice as long. The permitting agencies are under incredible stress dealing with activists intentionally flooding the system with questions asked in many different ways to further delay the pipeline approval process. Because the agencies are obligated to answer each question, it is no surprise that it takes two to three years for a pipeline project approval.
Is it more favorable to work in the United States or Canada considering these challenges?
Craig: Both countries have significant regulatory challenges but each also possesses world-class production basins and the associated need for pipeline infrastructure, so we’re very happy with our footprint.
Dearing: Currently, it feels more favorable to work in the U.S., as the approval process has been easier.
Osborn: I’m not sure one country has any advantage over the other. Both are challenged with similar issues but under different processes. I think it’s important that our governments continue to try to gain alignment. The natural resources Canada has are critical to the United States in order to be able to keep up with the demand and lessen our need for imports from the Middle East and South America.
Waugh: I believe the regulatory environment in Canada is currently much more challenging for the pipeline owners.
How have higher oil prices affected the pipeline industry?
Craig: We’re already seeing egress bottlenecks in the prolific Permian and Western Canadian production basins as well as depressed local basis differentials, so higher benchmark oil prices may not incentivize the increased production activity many are predicting until we can develop, permit and execute additional takeaway pipeline infrastructure.
Osborn: Higher oil prices helped bring in more product in marginal fields. They have also helped transportation companies out by creating more operating capital to fund past, existing and future infrastructure. By building out more pipelines, the shippers will have more options to provide product to the public, thereby helping to control prices.
Waugh: The oil and natural gas prices have a big impact for our industry. Higher prices instill expansion confidence and generate more CAPEX dollars for the pipeline owners.
Riess: It’s been a positive. Higher oil prices mean more production, and that drives demand to build more pipelines to move product. It’s a lot like what happened with the shale plays, there’s a lot of pipeline going in the ground when prices are good.
Will the U.S. exit from the Iran nuclear deal have an impact on pipelines?
Craig: I’m not going to speculate on that but will offer that the instability in the Middle East should further incentivize us to responsibly produce and transport our continent’s plentiful energy resources.
Osborn: Yes, it should be a wake-up call to the American public that we should be looking at getting supplies from friendly and neighboring countries like Canada and building the infrastructure within our own boundaries to meet our needs. This is the importance of getting political support for pipelines and streamlining the regulatory process here in the states.
Waugh: If the net result is a decline in Iran/OPEC’s oil output, then other global oil producing regions will see an increased demand, hence a positive impact.
Are environmental activists still having a big impact on the industry as the intense protests of DAPL did? How is that opposition today?
Craig: We anticipate continuing to see opposition to the safe and responsible development of our continent’s energy production and transmission systems. Effective engagement with as well as education and management of these organizations will be as critical a component as ever in the planning, construction, and operation of interstate pipelines across North America for the foreseeable future.
Dearing: Yes, they still have an impact, still protesting. It goes back to educating the public on the safety of oil and gas pipeline transportation.
Osborn: Environmental activists are still out there, although they haven’t had the exposure that was on DAPL. I think the reason for that is that the contractors, unions and owner companies are doing a much better job of educating the public about pipelines and all the positive things they bring to all families throughout the country. The industry is starting to be proactive instead of reactive to the false subjectivity that protest groups advertise.
I have to wonder if the opposition realizes the amount of energy that the world must produce in the next 20 years in order to stay ahead of the population growth. Michels is a large player in renewable fuels, but renewables just cannot supply the needed energy.
Waugh: Environmentalists do have an impact on many pipeline projects. While their passion is commendable, their message is based on faulty information and beliefs.
Despite the dependence we have on oil in all aspects of our lives, and the need for oil and pipelines construction, coupled by the fact that pipelines are the safest means to transport product, it’s remarkable the negative impact the environmental activists continue to wreak on this industry. In short, the environmental activist movement have done a superior job marketing their cause. Becoming more intense, they have coordinated and launched improved, sophisticated attack campaigns against energy infrastructure players, such as contractors, energy suppliers and others.
Riess: I think it’s still intense, but I don’t think it’s as it was with DAPL. Not only was that intense, but they solicited a huge number of people to camp out at the jobsite. We have opposition on some of our projects, but it might be 15-20 people.
How do you view the pipeline industry moving forward in the next five years? Is there stability? Uncertainty? Why?
Craig: My personal view is that the pipeline industry will experience strong and stable growth over the next several years. As I said above, technology is driving production to record levels and pipelines remain the safest and most reliable way to get that energy to high value end-use markets.
Dearing: I see it moving forward in the next few years, but there is an uncertainty to it.
Osborn: There are many projects on the drawing board, which leads to stability. The present political atmosphere in Washington, D.C., causes uncertainty. They are not all aligned with the need for infrastructure projects to support the growing demand. The pipeline industry must also work together to market this industry to develop and attract the next generation of people to run it.
Waugh: Cautiously optimistic. There are some good projects on the next five-year time horizon, but until the construction contracts are awarded and work begins, there is always a level of uncertainty.
Riess: There’s always going to be some stability as long as we operate a pipeline system in the U.S. of the size and magnitude as we do. There’s always going to be integrity management work, upgrades and upkeep. The pipeline industry for years has always been cyclical, with peaks and valleys. When we have a lot of gas or oil being produced, we’ll build pipelines. Once we get to a point that we don’t need more pipelines, we’ll add compression or pumps to get more throughput. The maintenance and upgrade work will always be here.
What other concerns do you have about the pipeline industry in North America?
Dearing: People continue to oppose pipelines due to lack of education on the subject.
Osborn: The industry is already behind in having the ability to provide the energy needed in the future. The prior presidency created a stalling effect on the development of the needed resources and transportation systems for the fossil fuels necessary to provide the amount of energy needed in the future.
Waugh: Pipeline construction worker availability, skill-set and safety are big concerns for our industry. The PLCAC and our trade union labor partners work collaboratively to recruit and train the next generation of skilled and safety-conscious pipeliners.
Riess: The only other concern that I have is that of a broader global perspective, which involves recruitment and retention. At the moment, the talk is about equipment and people to meet current demands. Broader than that is the difficulty of recruiting and retaining new employees to the pipeline industry. Truly a special breed, our Pipeliners have to travel 75-100 percent of the time, working 12- to 13-hour days. Sometimes compensation alone isn’t enough incentive to retain them. We consistently face challenges of recruiting and retaining employees who don’t seem interested in a long-term career of being on the road. The challenge we have now is getting a newer generation involved in carrying the work forward.
Henkels and McCoy, June 2018 Print Issue, market analysis, Michels Pipeline Construction, NPL Canada, PipeLine Machinery International, TransCanada
Bradley Kramer is managing editor of North American Oil & Gas Pipelines. Contact him at email@example.com.
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