The boom in the development of shale and unconventional oil and gas resources in the onshore United States is leading to an increased need for infrastructure to transport and process the increased production of oil and natural gas. This is particularly true in many resource plays where the production stream contains natural gas liquids and condensate.
Investopedia Markets: Explore the best one-stop source for financial news, quotes, and insights.
The Permian Basin has seen a surge of development over the last few years as operators look for oil and liquid resource plays that can be developed with horizontal drilling and fracturing. Some of these new plays require natural gas liquids to be separated out from the production stream.
EOG Resources (NYSE:EOG) is active in the Permian Basin and is developing the Wolfcamp Shale in West Texas. The company estimates that a typical well here will contain 42% oil, 28% natural gas and 30% natural gas liquids.
Southern Union Company (NYSE:SUG) recently approved the Red Bluff Project located in the Permian Basin. The project will have the capacity to process 200 million cubic feet per day of natural gas and require building a 60 mile pipeline network to handle 20,000 barrels per day of natural gas liquids. The Red Bluff Project is estimated to cost $235 million and will start operations sometime in 2013.
Southern Union Company already has a large presence in the Permian Basin, with approximately 5,500 miles of pipelines and ten operating facilities to process natural gas.
The Marcellus Shale is another fast growing play in the United States and operators are flocking to this natural gas play in the Appalachian Basin. Dominion Resources (NYSE:D) recently approved the construction of a processing and fractionation facility in West Virginia to handle production from the Marcellus Shale. The company expects the plant to be operational at the end of 2012 and has already pre sold 90% of this new capacity.
The problem for exploration and production companies in the Williston Basin is not processing capacity as much as the need for pipelines to transport the growing production from the Bakken formation. Crude oil production from the Williston Basin is expected to reach 1.2 million barrels per day by 2015, approximately triple the current level.
Since pipelines can't be approved and built quickly enough, the railroad industry is stepping in to help get the crude oil to end markets. BNSF Railway, which is owned by Berkshire Hathaway (NYSE:BRK.A, BRK.B), has 1,000 miles of track in the basin and is currently building eight new rail facilities.
The railroads are also taking advantage of the demand for various supplies needed to drill and complete wells, with BNSF estimating that each well site requires 23 rail cars of materials every month. These materials include proppant, drill pipe, drilling fluid and cement.
Tesoro (NYSE:TSO) is planning on building a dedicated rail route from the Bakken to a refinery the company owns in Washington. The project will cost $50 million and will have capacity to transport up to 30,000 barrels of oil per day.
The Bottom Line
Investors that want to play the energy sector can find midstream operators and other companies that will benefit indirectly from the boom in development. These companies are often less volatile as earnings are not tied directly to commodity prices. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. See How To Pick A Stock.)