Lack of pipeline capacity may dim U.S. energy revival

By BERNARD L. WEINSTEIN

Thanks to what's sometimes called the "shale revolution," America has re-emerged as an energy superpower. Even with prices 40 percent lower than a year ago, we remain the world's number one producer of crude oil and other liquid hydrocarbons. Imports of oil have dropped from 60 percent of consumption to about 35 percent just in the past five years. We're also the world's largest producer of natural gas.

Both oil and natural gas output in America would be even higher if not for a number of regulatory and infrastructure constraints. For example, crude oil exports have been virtually prohibited by law for more than 40 years while federal regulatory agencies have been slow to issue permits for the export of liquefied natural gas.

Drilling for oil and gas on the outer continental shelf and federal lands is largely prohibited, while several states and local governments have imposed bans on hydraulic fracturing. The Jones Act, which requires all goods shipped between U.S. ports be carried on American-built, -owned and -operated vessels, makes it more expensive to ship petroleum products from Corpus Christi to New Jersey than from Corpus Christi to Rotterdam.

Lack of capacity across U.S.

But the most serious nonregulatory constraint on expansion of America's oil and gas production - other than low prices - is a lack of pipeline capacity, both upstream and downstream. For example, as production of natural gas has surged in the Marcellus and Utica shales of the Northeast, investment in pipeline and processing plant infrastructure has lagged. Consequently, Marcellus gas sells at up to a 50 percent discount to the national benchmark at Henry Hub. Though 10 new pipelines have been proposed to alleviate these takeaway constraints, the projects will take years to complete and some may never materialize because of pushback from environmentalists and the difficulty of securing long-term supply agreements with electric utilities.

In terms of downstream bottlenecks, President Barack Obama's veto of the Keystone XL pipeline is perhaps the most egregious example. Opposition from environmentalists and aboriginal groups has also stalled the Enbridge Northern Gateway project in Western Canada while another Canadian aboriginal group turned down a $1 billion fee to help push through a proposed gas pipeline and LNG terminal in British Columbia. A proposed dual pipeline between Albany, N.Y. and Linden, N.J., that would transport Bakken crude oil south and refined products north is also facing strong environmental and community opposition.

Expense, safety questioned on trains

This lack of pipeline capacity helps explain why so much crude oil is now moving by rail tanker car. In 2008, only about 10 million barrels of oil were transported by rail. Last year's volumes exceeded 300 million. Though this growth has been a boon to the rail industry, moving crude oil long distances by train is more expensive than by pipeline, and spill rates are considerably higher. Oil transport by rail is also under fire from environmentalists, with seven groups filing a lawsuit on May 14 challenging recently issued safety rules for trains hauling oil.

Despite projected expansion of renewable energy sources and pushback from anti-hydrocarbon groups, the U.S. Department of Energy in its latest Quadrennial Energy Review predicts we'll still be dependent on oil and natural gas to meet more than 60 percent of our energy needs in the year 2040. Because of our prolific shale plays, we should be able to supply virtually all of our future consumption from domestic sources. But this won't happen unless we make the requisite investments in essential infrastructure, especially pipelines.

No doubt the environmental lobby will jump on the recent rupture of an oil pipeline in California that spilled 500 barrels as another reason to fight new construction. But we should keep in mind that last year our pipelines safely transported more than 14 billion barrels of crude oil and trillions of cubic feet of natural gas.

Upgrading and expanding upstream and downstream pipeline networks can help sustain America's energy renaissance while creating thousands of new jobs. Not investing in our pipeline infrastructure will stifle energy growth, leave us vulnerable to supply disruptions and weaken our energy security.

Weinstein is associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business at Southern Methodist University.