Why I Like Pipeline MLPs

Today, natural gas supplies about a quarter of energy in the US. However, forecasts by the US Energy Information Administration are calling for natural gas consumption to increase by over 40% by 2025! This is fueled primarily by the increased use of natural gas for electricity generation instead of coal. However, gas supply in the US is facing uncertainty as existing conventional wells continue to mature and dry up. This presents a problem for the US, as it begins assessing the possibility of increasing energy independence and using cleaner burning fuels.

We’ve Got it – We Just Need to Get It

The US actually has abundant reserves in the Rocky Mountains, the Gulf of Mexico, and in Alaska. In fact, some estimates put the amount of undiscovered gas resources at over 1,040 trillion cubic feet (enough to last almost 50 years!). However, environmental concerns (reasonably so) restrict drilling access to these reserves. Because of this, the demand for “unconventional” natural gas production sources such as coalbed methane, deep water, and tight sands has increased.

The Opportunity for Pipelines

Texas & Mid-Continental tight sands and shales are estimated to represent about about 40% of reserves by 2012. With unconventional sources on the rise, more and more gas will come from these areas. The bottom line: the gas has to get where there is demand for it – and there is significant demand in the Northeast United States and other areas. This is where pipelines benefit, as demand for long haul transportation will increase which will, in turn, increase revenue via tariffs, etc. Add into the mix the fact that pipelines have a reduced exposure to commodity prices due to their tariff based revenue structure, and you have yourself quite a compelling argument.