What's driving the pipeline boom?

Vorn_pipesDanndalfPhoto by: DanndalfA new report is predicting a boom in onshore pipeline construction. Vaughan O'Grady asks one of the report's authors why this is, and whether Middle Eastern and African markets ― especially those supplying LNG ― should see this as an opportunity or a threat.

IT’S A GOOD time to be in the onshore pipeline business. The World Onshore Pipelines Report* published by energy research and analysis group Douglas-Westwood, forecasts a significant market, with expenditure totalling $193bn in the period from 2011 to 2015.

There are a number of drivers encouraging the growth of the onshore pipelines market: global emergence from the economic downturn that put a lot of projects on hold; local sources of gas and oil supply running low in Western Europe; new sources of oil and gas from such countries as the US and Canada; continuing demand from power-hungry China and India; and the long-standing need to repair or replace many existing pipelines. The result has been a boost to pipeline construction that will continue for some time.

Much of this onshore pipeline construction activity will be for gas transport, but new sources of oil will also have an impact on the market. Adrian John, one of the authors of the report, agrees that oil pipeline infrastructure is very well developed and thus the growth in consumption relative to gas is not going to be as great. However, he says, “In locations such as China and India and other developing regions of the world, over the coming years we'll see greater levels of investment in oil pipelines”. In addition, he says, “The development of unconventional sources of oil, such as oil sands, particularly offers long-term opportunities”.

But gas remains the main factor in the growth of the onshore pipeline market ― and the emphasis on gas will grow. Gas ― natural and associated ― is seen as more environmentally friendly than oil in many applications, and as more efficient for power generation. John says, “For many years associated gas, for example, was just considered a waste product. That has certainly changed. Everybody is looking to monetise gas resources and there are huge reserves around the world. The growth in gas consumption will in all likelihood intensify greatly as oil production peaks and oil prices rise, as it is a ready and abundant alternate source of energy.” Nor is gas likely to run out any time soon. “The vast reserves of natural gas globally will allow for consumption growth to 2050 and beyond, depending on the rate at which consumption grows naturally,” says John.

And that growth may not just be in traditional uses of gas. John explains, “As inevitably oil prices begin to rise, finding replacement sources of energy becomes essential. For example there are certain technologies such as GTL ― gas to liquid ― which can be used to turn natural gas into petroleum products such as gasoil (diesel-type fuel) and kerosene.” Of course the economics for developing GTL plants only become favourable at much higher oil prices, but that may time may not be far off.

Not only are natural and associated gas major drivers of pipeline construction; even LNG, a mainly ship-borne product, requires some pipeline infrastructure. John notes,“Taking gas from source to liquefaction plants, particularly at coastal locations, requires pipelines. You can need some cryogenic pipelines to transport [the gas] over very short distances from a liquefaction plant to the ships. And then, upon delivery at import terminals, once it’s been regasified it needs to be transported to existing distribution networks: that typically requires further investment in natural gas pipelines. So, fundamentally,” he concludes, “when we’re talking about gas pipelines it really does involve everything.”

The ever-increasing distances likely to be traversed by the pipelines of tomorrow are impressive but the size of the pipes involved is growing too. The report sums up both trends thus: “The most significant growth in length installed and associated Capex will be seen for pipelines with diameters in the range of 54 inches or larger. Total Capex for pipelines in this diameter range is expected to rise from $21.5bn between 2006 and 2010 to $30.6bn between 2011 and 2015 (42 per cent). The corresponding total lengths will increase from 9,308 km to 10,808 km (16 per cent). This trend is driven by a global growth in long large-diameter export and cross-country pipeline projects, particularly in Asia and Eastern Europe and the Former Soviet Union (FSU), designed to help meet the challenges of growing energy demand, shifting natural gas production concentrations, and energy supply security.”

Of course this trend towards wide diameter pipelines will not be universal. “Pipeline projects need to be fit for purpose,” says John. “There is no point having a half-empty or under-utilised pipeline. Thus pipelines are designed with the demand of the end user as well as the limitations of available supply in mind.”

He continues: “Securing long-term supply contracts provides the justification for the large investment in LNG infrastructure required and helps to provide a clear long-term view on the expected return on investment, essentially 'de-risking' the projects. However,” he warns, “it is worth noting that the development of unconventional sources of gas, such as shale gas in locations like North America, does pose some threat to future LNG projects. By providing an abundant and much cheaper source of gas, shale project developments may well undermine the economics of proposed LNG projects, as well as increasing the gas supply glut and providing downward pressure on natural gas prices more generally.”

But there is at least one pipeline project that could explicity compete with LNG. The Trans-Saharan Gas Pipeline aims to bring gas from Nigeria via Niger and Algeria, providing a strategic route to markets in Europe that reduces the costs of monetising gas compared with LNG solutions. “The proposed pipeline is 4,128 km in length,” says John, “but,” he adds, “is unlikely to happen for many years to come.”

Or possibly at all. “Negotiations surrounding that continue but naturally some of these locations ― the Middle East and Africa ― suffer from political instability,” says John. This can sometimes undermine major transnational pipeline proposals, he says. That is because “the security operations required to keep these projects safe just seem too daunting and so they never quite get off the ground”. This is undoubtedly a major concern. Once they are built, pipelines tend to remain fairly reliable for long periods, not least because, whether on land or under water, they are buried. The only major threat to their effectiveness, it seems, is the possibility of attack, making detection technology ― and even manned patrols in more volatile regions ― a reasonably lucrative business.

Even though these projects are far in the future (and some may not happen) the report's outlook for the forecast period is an optimistic one. In fact its figure may yet prove an underestimate. “We believe that our forecasts for expenditure in the onshore pipeline market may prove to be conservative, and that expenditure over the period to 2015 may exceed the amounts presented in our forecast,” says John.

For example, he points out, some projects cautiously estimated as going ahead in the post-2015 period may well happen earlier. Even where projects are certain to take place in the forecast period, costs may rise compared to estimates. And, John points out, “small projects and expansion projects require much less time than many of the large scale ‘mega-projects’ to develop from the planning phase to completion. Consequently, there tends to be less visibility for such projects; thus, these types of projects offer the potential for significant upside on our forecast numbers.” In other words, even $193bn could be an underestimate.


*The World Onshore Pipelines Report presents a comprehensive view of the historic market from 2006-2010 and the forecast period from 2011-2015. For more information and prices, go to http://www.dw-1.com/shop/index.php

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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