When pipeliners get together for a gab, what do you think is on their minds? You’ll find out if you attend the American Petroleum Institute’s Pipeline Conference and Exposition this year.
The pipeline industry is absolutely essential to the safe running of the continent’s energy system. North America produces some 25 million barrels of oil per day, and 1.2 trillion cubic meters of gas annually, virtually all of which moves at one point by pipeline. Well over a quarter of the entire planet’s oil and gas is transported by a handful of regional and continental industrial companies in steel tubes that are all but invisible to the general public, as it should be since the product is so dangerous. What gets discussed here matters.
The conference will focus on three broad themes:
Sustain — maintaining high levels of operational performance
Transform — implementing valued changes that advance the industry
Secure — protecting the industry from threats
These themes make complete sense to me. First, the task of sustaining an industry that is already at enormous scale, with a gigantic installed base of linear infrastructure that spans millions of miles is critically important. That task is complicated by two factors. The first is the urgent need to transform how the industry operates to deal with its pressing challenges. The second is to secure the industry from risks, both traditional and new, in a world of threats.
Personally, I go to conferences like these seeking answers to what I see as the defining questions of the day. In the case of the pipeline industry, here are some that are on my mind.
Where Is The Growth?
Given global moves to flatten demand for hydrocarbons, the question of where the industry will see growth is pressing. There is always some growth — new gathering systems for crude oil and natural gas — but demand for oil in the US has been flat for a decade or more. The US refinery sector has shrunk by 1 million barrels per day refining capacity since 2020, and is at its lowest level since 2014 (a lost decade). Governments globally are aiming to flatten demand for liquid fuels as a climate priority in the next 7 years.
There are no new oil refineries being built in North America, and several are for sale. The biggest market for fossil fuels (China) is now the biggest producer of solar panels, wind turbines, batteries and electric vehicles. China Inc sees a better future dominating new energy (a manufacturing play) and weaning itself off the old (a resources play). The demand for fuels is certain to shrink as Chinese consumers switch over to electrified transportation. Africa has the population base for growth and a per capita energy consumption that is 8% of North America, but struggles to absorb new capital at scale.
Even gas faces an uphill battle. Many markets, particularly those whose baseload energy is supplied by coal, see gas as the solution to their climate commitments, whereas parts of North America increasingly see gas as a problem. Gas fireplaces are now banned in some North American markets.
Transmission infrastructure for LNG exports are now in doubt given the Biden administration’s recent pause on approvals for new export infrastructure. CO2 gathering and transmission systems are promising but no where near the scale required to replace the shrinking oil refining sector. The best sources for CO2 at interesting volumes are flue stacks of coal and natural gas power plants, but coal is being rapidly phased out, and renewables are taking most of the growth in the energy industry.
Hydrogen is promising, but not in the short term. Hydrogen molecules are so svelte that they slip through the steels that are fine for fat liquids and gases. Plans to repurpose existing infrastructure will take a meandering tour through America’s tortured permitting processes. Aside from oil refineries, who need hydrogen for petroleum production, there are at present no big demand sources that can backstop a new pipeline project.
Material growth in volume can come from extracting marginal capacity gains throughout the entire transmission system. There is no silver bullet here, but lots of tough slogging to capture a percentage gain here and there. There will be dozens of talks on offer that highlight what are individually small opportunities, but which add up to an interesting bottom line growth game-plan. Virtually all will be enabled through some kind of technology that helps optimize, streamline, simplify, or automate some aspect of the industry.
The second path to growth is inorganic, but that requires money.
Where Is The Capital?
The unrelenting negative narrative about the industry is choking off the supply of capital, both money and human (more on people later). Capital markets are now skittish about investing in new fossil fuel energy projects whose prospects cannot be reliably forecasted beyond 2030. The LNG decision by the Biden Administration underscores the new level of risk that investors face in pursuing traditional fossil fuel energy projects.
The recent round of industry consolidation taking place among oil producers has largely been self financed through share swaps, and not with new debt. It helps that strong commodity prices (thanks Putin) have filled up the coffers. But the coffers are being spent on buying back shares, maintaining production levels, and paying down debt (which is now expensive). A meager 5% is being directed at energy system innovation.
Capital also has far more exciting places to invest. On February 29 of this year, the market capitalization of the six largest listed non energy companies in the world was $12.6 trillion. These companies include Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia (a chip maker). The Business Research Company estimates that the value of the global oil and gas industry production (crude oil, refined products, lubricants, natural gas), in 2027, will be $8.7 trillion. It’s not a surprise that data is viewed as the new oil.
It takes a lot less work to decide to put your money into these six giants than to research the thousands of smaller companies toiling away in energy.
Pipelines are constantly tuning their portfolios with a steady stream of transactions, but with the consolidation in the upstream, the negotiating balance of power will swing over to the gigantic shippers. I would not be surprised to see a wave of consolidation wash over the pipeline sector, also paid for through shares and not capital markets.
There should be plenty of discussion on changing market dynamics, optimizing capital usage, using intelligence tools to identify consolidation possibilities, and using data to improve negotiating positions against large shippers.
Where Is The Talent?
Pity the poor Deans of Energy at petroleum schools. Enrollments in petroleum studies in the OECD have been declining for years. Some schools have simply closed, or have been forced to embrace foreign students at an uncomfortably high level. Once enrollment drops, the teachers and researchers move on, putting institutions into a slow death spiral. Space given over to studies shrivels. In response, schools are reconfiguring their curricula to focus more on hot energy fields such as renewables, clean tech, and electrification.
Young people unsurprisingly steer clear of careers that are characterized as dead end by their peers, parents, social workers, and guidance counsellors, and reinforced by activists. Today’s new entrants into the workforce have known no other world than one that is centered around personal technologies, like phones and tablets which continue to be banned on the front lines of most energy companies.
They sense their deep personal relationships with digital companies such as TikTok, YouTube, Amazon, Google, and soon OpenAI. That’s where they play, express themselves, build their networks, and where they’ll want to work. The stock options on offer are way more valuable relative to those in energy, and there’s no need to go through the tough sledding of engineering schools when you can pick up coding skills from YouTube.
The only viable pathways forward for pipelines is to recondition their existing workforce for the future. This means aggressive up-skilling and re-skilling across a broad range of fields, including data and analytics, innovation, automation, safety, regulations, cyber, and compliance. Much change will come to the field and the control room, which have been conditioned to accept change more readily because of the searing effects of the pandemic.
There should be plenty of good talks on successful change initiatives, tactics for rolling out innovations, capturing knowledge, and leveraging new technologies to enhance the performance of the new and the mature worker.
There’s clearly lots to discuss.
Register today
This conference is shaping up to be huge success. As an aside, I’ll be speaking at the event too, with a focus on my most recent book and its messages about the leading practices for implementing change in the industry. Sign up.
Artwork is by Geoffrey Cann, and cranked out on an iPad using Procreate.
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About Dave:
Until recently, Dave was the CFO at EQT Corporation, a big US independent gas producer. Prior to joining EQT Corp., Dave served as the Executive Vice President and Chief Financial Officer of CONSOL Energy and as CFO and as a board member of its affiliates, including CNX Midstream Partners LLC and a joint venture with Noble Energy. Dave developed a deep understanding of the commodity markets through almost 2 decades as a financial analyst on Wall Street. He holds a B.A. in biological sciences from State University of New York—Binghamton and an M.B.A. in corporate accounting and finance from the University of Rochester and has been a chartered financial analyst (CFA) for 25 years.
Geoffrey Cann writes about, speaks to and teaches the energy industry about digital innovation. For more about Geoffrey Cann, click here.