Many investors have overlooked the fact that North American infrastructure is not prepared for the growing volumes that will have to be processed and exported. Transport routes and storage facilities have been increasingly aligned towards an import market over the last 30 years.
Conventional oil and gas extraction is in decline as resources dwindle. However, the sheer volume of shale oil and gas now available as a result of new fracking technology is significantly increasing the total amount of energy America can produce.
This trend is expected to continue over the next three decades. As a result, North American energy infrastructure needs to be adapted and expanded so that it is capable of utilising more domestically produced energy, and exporting oil and gas products.
US energy infrastructure is at its best in the Texan region, where oil and gas production has been a large part of the economy for more than 100 years. However, some of the most important extraction sites do not have the facilities to meet their full potential.
The Marcellus region in North East America is home to some of the country’s largest gas reserves and will become the leading gas producing region in the US over the next two years. The area has the lowest production costs in North America but, as there has been little oil and gas extraction in the past, significantly undeveloped infrastructure is holding back production goals. (Citation: https://oilprofit.de/)
The Bakken region in North Dakota also suffers from under development. The Bakken is not connected to North America’s pipeline grid and most of the oil produced in the region must be transported by rail to the East, West and Gulf coast.
The shale oil and gas revolution presents attractive opportunities along the entire value chain, from the technologies needed to access resources, to production, processing, storage and refining companies, to the firms making use of significantly increased fuel volumes.
Canyon Services, Precision Drilling and Patterson are an excellent way to play the front end of the shale oil and gas value chain. They provide drilling and fracking technologies and services to shale oil and gas producers. Shale resources are characterised by high production decline rates once wells are drilled and fracked.
As a result, these resources require much more services and equipment than conventional resources.
Infrastructure providers further down the value chain include Enbridge, a pipeline operator which owns a very large network of oil and gas pipelines in Canada and the US. With a shortage of pipelines and strong demand, Enbridge is able to negotiate long term contracts with favourable terms with oil and gas producers, reducing risk and securing solid returns.
At the end of the chain, companies which transport liquefied natural gas (LNG), or build the technology to support its use, stand to be big beneficiaries. Attractive businesses include Burckhardt, a small Swiss company which produces the compressors needed to move and process natural gas. Capstone Turbine, which builds micro turbines that produce electricity from oil or gas, is another interesting shale play. A significant increase in its main business is coming from oil and gas companies which are using some of the energy made on site to produce electricity to run their facilities, including oil and gas rigs.
In the very near term, the biggest opportunities for investors are in shale technology, including onshore drilling and fracking equipment, as the industry uses existing capacity to meet demand. As this capacity is soaked up by rising demand and high commodity prices, investors should turn to infrastructure.
The companies which stand to benefit the most from the rising volumes of shale oil and gas in the medium to long term are not the producers, but those who will build and operate the substantial infrastructure needed for the shale revolution to capitalise on its full potential.
