Energy Infrastructure

Brookfield Energy Infrastructure May 2022 Industry Overview: Gas Infrastructure in High Demand

Article

Jun 10, 2022

  • The broader midstream universe, as measured by the Alerian Midstream Energy Index (AMNA), returned 6.36% in May.
  • Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), returned 7.73% in May.
  • The broader market, as measured by the S&P 500 Index, returned 0.18% in May.

Midstream significantly outperformed the S&P 500 Index once again in May and has outperformed the broader market by roughly 30% year to date. The war in Ukraine, gradual reopening in China, and rumors of curtailment in Russian energy exports have continued to drive the bullish fundamental narrative for oil supply-demand balances, as crude oil ended up 9.5% on the month. NYMEX natural gas prices also jumped sharply in May and reached their highest levels since the summer of 2008.

The moves we are seeing in the natural gas market are quite dramatic and a sharp change to the low-price environment the market had grown accustomed to since the advent of the shale revolution. It is particularly notable that these elevated price levels are being reached in the lower-demand spring months, or shoulder season. Gas prices are also high in global markets, signaling the need for additional supplies and infrastructure in order to answer the call of higher demand.

The Factors Driving Gas Prices to 14-Year Highs

A move this drastic is hard to explain by pointing to one simple factor. Instead, a combination of factors has led us to this point. In Europe, Russian supply uncertainty has added a geopolitical premium to already-high gas prices. European gas prices have been elevated for the better part of a year as gas storage levels have been well below historical norms. European nations are choosing to diversify natural gas supply by paying a premium for liquefied natural gas (LNG) cargoes to be redirected from their original destination, mostly from Asia. This fight for LNG exports between Europe and Asia has created a bidding war and upward pressure on prices, as LNG supply is unable to react quickly enough given the long-lead time needed to build new LNG export capacity. Other factors increasing global demand include parts of China reopening from government-mandated lockdowns and the need to refill storage ahead of cooling and heating seasons. Finally, high North American demand and the limited availability of substitutes in the power sector have created a competition for coal and natural gas in the power stack, driving up domestic prices.

On the supply side for oil, OPEC+ continues to underperform its production quotas by as much as 178%, according to Reuters. This underperformance by OPEC+ has been the norm, not the exception, and as of late the group has been unable to produce up to its prior stated production goals. Even though these production targets are set for barrels of oil, the underperformance still has an important impact on natural gas market and gas prices globally. With little-to-no production growth coming from OPEC+ and a global desire to reduce dependence on Russian gas, the focus has shifted to the U.S. and Canada to help solve the current supply-demand imbalance.

The Outlook for Gas Infrastructure

We have begun to see a flurry of activity in incremental long-haul gas pipeline capacity and new long-term LNG agreements, as U.S. and Canada midstream providers look to play a key role in solving the ongoing global natural gas crisis. We have written extensively about the resource potential of the Permian and the competitive advantages it has relative to other basins. It is no surprise that four different projects to provide further gas takeaway capacity from in-basin to the Gulf Coast have been announced during the past few weeks.

  • April 25: Permian Highway Pipeline, owned by subsidiaries of Kinder Morgan, Inc. (NYSE: KMI), Kinetik Holdings Inc. (NASDAQ: KNTK) and ExxonMobil (NYSE: XOM), announced a binding open season to solicit commitments for an expansion of the pipeline from 2 billion cubic feet per day (Bcf/d) to nearly 2.65 Bcf/d. The target in-service date for the project is October 1, 2023.
  • May 2: Whistler Pipeline, owned by MPLX LP (NYSE: MPLX), WhiteWater Midstream, and a joint venture between Stonepeak Infrastructure Partners and West Texas Gas, Inc., announced a final investment decision on the expansion of the pipeline from 2 Bcf/d to 2.5 Bcf/d. The expansion is expected to be in service in September 2023.
  • May 16: Gulf Coast Express Pipeline LLC, owned by KMI DCP Midstream, LP (NYSE: DCP), an affiliate of ArcLight Capital Partners, LLC, and KNTK, announced an open season to solicit commitments for an expansion of the pipeline from 2 Bcf/d to nearly 2.57 Bcf/d. The target in-service date for the project is December 1, 2023.
  • May 19: WhiteWater, EnLink Midstream, LLC (NYSE: ENLC), Devon Energy Corp. (NYSE: DVN), and MPLX LP (NYSE: MPLX) reached a final investment decision to move forward with the construction of the Matterhorn Express Pipeline. The pipeline is designed to transport up to 2.5 Bcf/d from the Permian to Katy, TX. The pipeline is expected to be in service by Q3 2024.

The incremental capacity offered by these projects provides certainty of egress to producers looking to ramp Permian production as project in-service dates come closer to fruition. LNG exports will be the primary long-term beneficiary of this increased flow of gas to the coast, and we have begun to see incremental long-term offtake deals signed with major international counterparties.

Just since the beginning of April, we have seen 1.4 Bcf/d of new long-term contracted capacity signed by U.S. LNG exporters. However, it is important to note that only about 15% of that is with European counterparties, given the desire to replace Russian volumes—most of the new long-term deals have been signed with Asian buyers. We think commercial momentum is stronger than it has ever been for LNG exports, and we expect this dynamic to continue for some time. We believe there are still plenty of business opportunities to lure European buyers to the table, especially with global futures curves remaining elevated for several years.

The Implications for Midstream Companies

We have long believed that the natural gas sector has a many decades-long runway, but even still, this level of pipeline expansions and LNG contracting activity would have been difficult to fathom just a couple of years ago—especially during the depths of the COVID pandemic. The speed with which we have moved from an oversupplied energy market to an undersupplied one has surprised many but is indicative of the strength in demand for hydrocarbons and the need to invest continually in new supplies. With respect to the LNG markets, we believe additional final investment decisions in the U.S. and Canada are on the horizon; while things are moving fast, we are closely watching new developments and the expected positive knock-on effects to the entire North American midstream value chain.

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One million BTU is a measure of heat energy equal to 1,000,000 BTU, which are equal to the amount of heat energy required to increase the temperature of one pound of water one degree Fahrenheit.

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