As the US economy continues to slowly improve, 2013 may usher in the start of the biggest expansion of energy infrastructure investment seen in the US in more than 50 years, particularly in regard to tight gas and tight oil.

This is the result of two mega trends converging: the maturation of investment funds focused on infrastructure as an asset class and the discovery of vast untapped oil and gas reserves in North America, particularly from Canada’s oil sands and in US shale beds such as the Marcellus formation, which according to the United States Geological Survey covers roughly 95,000 square miles, ranging in depth from 4,000 to 8,000 feet, as well as the larger Utica formation.

As a result, the US Energy Information Administration (EIA) projects US natural gas production to increase from 21.6 trillion cubic feet in 2010 to 27.9 trillion cubic feet in 2035, a 29% increase. Almost all of this increase is due to projected growth in shale gas production, which is expected to grow from 5.0 trillion cubic feet in 2010 to 13.6 trillion cubic feet in 2035.1

However, delivering this reserve to consumers will require the building and financing of pipelines, storage, transmission and waste water containment and treatment facilities. According to a recent study conducted by industry analyst firm IHS, nearly $1.9 trillion in cumulative capital investments in the drilling and capturing of tight gas are expected to be made between 2010 and 2035.2

“2013 may usher in the start of the biggest expansion of energy infrastructure investment seen in the US in more than 50 years.”

Infrastructure as an Asset Class

Development of infrastructure projects dates back to ancient times when aquifers were built to provide fresh water for farming and human consumption. Because of its fundamental importance to the sustainability of major population areas and economic growth in the US, federal, state or municipal governments generally paid or indirectly supported the cost of financing infrastructure, both energy and non-energy, through US or state tax dollars and/or municipal bonds, rather than through private investment.

In the early 2000s, taking a page from the European markets, which had privatized many transportation infrastructure projects, private equity firms created infrastructure funds, hoping to capitalize on the great need for US transportation projects such as toll roads, bridges, light rail and airports, which they believed would generate lower, but more stable, reliable long-term rates of return.

But when the financial crisis hit in 2007, many of the earlier infrastructure investments were wiped out. With the subsequent tightening of the credit market and high unemployment rates, the expected inventory of private transportation projects failed to materialize, and these funds turned to energy assets to deploy the capital.

Marcellus

Also in 2007 came the news that the Marcellus Shale actually contained more trapped natural gas than had earlier been recognized. Indeed, early production rates from some of the new wells has been over one million cubic feet of natural gas per day. As the chart below shows, only 27 Marcellus Shale wells existed in Pennsylvania in 2007; by 2011 the number of wells drilled had risen to 2073.

Click here to view table.

As for the other US shale formations, according to the EIA’s Annual Energy Outlook 2012, 86 percent of the total 750 trillion cubic feet of technically recoverable shale gas resources are located in the Northeast, Gulf Coast, and Southwest regions, which account for 63 percent, 13 percent, and 10 percent of the total, respectively. In the three regions, the largest shale gas plays thus far are the Marcellus (410.3 trillion cubic feet, 55 percent of the total), Haynesville (74.7 trillion cubic feet, 10 percent of the total), and Barnett (43.4 trillion cubic feet, 6 percent of the total).

As for technically recoverable shale oils resources, EIA estimates a total of 23.9 billion barrels in the onshore Lower 48 States. The largest shale oil formation is the Monterey/Santos play in southern California, which is estimated to hold 15.4 billion barrels or 64 percent of the total shale oil resources. The Monterey shale play is the primary source rock for the conventional oil reservoirs found in the Santa Maria and San Joaquin Basins in southern California. The next largest shale oil plays are the Bakken and Eagle Ford, which are assessed to hold approximately 3.6 billion barrels and 3.4 billion barrels of oil, respectively.3

New Infrastructure Needed

These estimates are clearly exciting, but no one knows for sure the ultimate amount of recoverable natural gas and shale oil. Some wells may dry up quickly, while others will keep producing for decades. Nor do we yet know what new technologies will be developed in the near future to help us reach tight gas and oil reserves buried deep in the shale formations, though if the past decade serves as an indicator, technological improvements will likely be significant. One thing is certain: the total natural gas pipeline capacity currently available accounts for a tiny fraction of what is needed.

“No one knows for sure the ultimate amount of recoverable natural gas and shale oil. Some wells may dry up quickly, while others will keep producing for decades.”

Several new pipelines must be built to transport millions of cubic feet of natural gas per day to major markets. In addition, thousands of miles of natural gas gathering systems must be built to connect individual wells to the major pipelines.

Here Come the Funds

Earlier this year, Tiger Infrastructure Partners, a private equity firm founded by former Treasury official Emil Henry Jr., announced it had formed a partnership with privately held construction company, Kiewit Corp., to invest up to $500 million in pipeline projects.4

Based in Omaha, with offices also in Houston and Calgary, Kiewit has designed and developed more than 800 projects for the gas, oil and chemical industry valued at nearly $11.8 billion over the last 10 years, according to the company’s website. It also has been focusing heavily on the design and construction of wastewater treatment facilities, which will be an integral part of any tight gas drilling venture.

“One thing is certain: the total natural gas pipeline capacity currently available accounts for a tiny fraction of what is needed.”

Also earlier this year, private equity firm First Reserve Energy Infrastructure formed a new venture to build pipelines throughout the booming oil fields of North Dakota, an investment aimed at resolving transportation bottlenecks plaguing energy producers in the region.

The firm has committed $150 million to a joint venture with Denver-based oil-and-gas producer Triangle Petroleum Corp. to launch a pipeline and transportation company focused on the Bakken Shale, an unconventional oil-and-gas play that has turned North Dakota into the second-largest energy-producing state in the country after Texas. The new company, Caliber Midstream Partners LP, will begin by constructing pipeline gathering systems with a capacity of 10,000 barrels of oil and 15 million cubic feet of natural gas a day by the middle of next year, connecting more than 100 far-flung oil and natural-gas well sites to rail terminals. The company also plans to add pipelines that will link wells to major interstate pipelines that cut through the region.

These investments are early examples of what are likely to be many more such transactions to come.

Other Cost Factors

Natural gas burns more cleanly than coal or oil, emitting significantly lower levels of carbon dioxide (CO2) and sulfur dioxide. When used in efficient combined-cycle power plants, natural gas combustion can emit less than half as much CO2 as coal combustion, per unit of electricity output, making it a “greener” fuel than coal or oil.5

However, potential environmental concerns associated with the production of shale gas exist. Fracking requires huge amounts of water, which may impact the availability of water for other crucial uses as well as aquatic habitats. Moreover, if not handled correctly, fracking fluid, which often contains potentially hazardous chemicals, may release contaminants into nearby soil, streams and well-water systems. Fracking also produces large amounts of wastewater, which may contain dissolved chemicals and other contaminants that require treatment before disposal or reuse.

“If not handled correctly, fracking fluid, which often contains potentially hazardous chemicals, may release contaminants into nearby soil, streams and well-water systems.”

Cleanup and resulting litigation and government investigations can be extremely costly, time-consuming and potentially undermine support for fracking projects. The cost of environmental factors must therefore also be carefully considered when determining whether to invest in tight gas infrastructure.

Ultimately, the key infrastructure asset to be developed to unlock the tight energy resources may be adequate water treatment facilities.

Potential Impact for the US

The discovery and drilling of tight gas in US shale formations has the potential to remake the United States’ economy and energy policy as we know it. According to IHS, US shale gas production and related It could also substantially reduce the country’s reliance on foreign oil and gas reserves, potentially transforming US foreign policy, including its response to political and civil unrest in the Middle East, Russia, Latin America and other regions of the world which it currently relies upon for energy resources.

EIA’s Annual Energy Outlook 2012 projects US natural gas production will increase nearly 30 percent by 2035, while US natural gas consumption is expected to only increase by 16 percent in the same time frame. This means not only declining imports, but also will enable the US to become an exporter of natural gas to other countries for the first time as the chart below shows.

Click here to view chart.

To access and capitalize on these vast, previously untapped, carbon reserves in North America, pipelines, storage facilities, and wastewater processing plants need to be financed and built, which will create hundreds of thousands of new jobs in the US and offer a stable, relatively consistent rate of return for investors -- a perfect asset and risk balance for the billions of dollars flowing to infrastructure investment funds.

This article originally appeared in the December 2012 issue of North American Oil & Gas Pipelines.