Global Energy Infrastructure:

the Rush to Midstream 

June 2015


The advent of the natural gas era highlighted the urgent need for midstream infrastructure, particularly in the US and China (two of the largest natural gas reserve holders). While global upstream capital expenditure shows signs of decelerating, the focus is likely to shift to midstream infrastructure investments in the next five years. In recent years, the US oil & gas market has undergone a structural shift due to advances in drilling capabilities. Unconventional, horizontal drilling technology has led to growth in discovery of shale reserves and extraction. However, many regions lack the midstream infrastructure to transport the hydrocarbon produced; this is expected to drive significant midstream infrastructure investment in these region. According to the Interstate Natural Gas Association of America (INGAA), during 2014–35, USD641bn would be invested in midstream energy infrastructure to keep pace with growing oil and gas production in North America. In China, significant investment is required to build midstream infrastructure as the country develops its vast and mostly untapped shale gas reserves. 

Upstream: Global E&P spending shows signs of deceleration

Global exploration and production (E&P) spending is showing signs of deceleration as oil majors reduce upstream expenditure and national oil companies (NOCs) exhibit a mixed trend. According to Barclays Research, global E&P spending would increase 6.1% year-on-year to USD723bn in 2014. The expected growth rate of 6.1% in 2014 is lower than the 10.6% and 10.8% increase in 2013 and 2012, respectively, as well as the average growth of 14.4% during 2010–13.

IOCs to underinvest; NOCs exhibit mixed trend

Shareholder activism is compelling international oil companies (IOCs) to curb vast capital spending, and increase dividend and share buyback. Although this was initially observed among mid-sized North American E&P companies, oil majors are also rationalizing their capital spend. Shareholders are pressurizing oil companies to achieve the right balance in capital spending and dividend distribution amid rising industry costs and stagnating oil prices. The big three majors (ExxonMobil, Chevron, and Royal Dutch Shell) have indicated that they expect capex to level off in the next few years. ExxonMobil announced that it will cut  exploration capital spending to <USD37bn per year during 2015–17 from USD42.5bn in 2013. Shell indicated that its spending would moderate and asset sales increase, and Chevron expects flattening of its capital spending after 2013–14. Total      SA recently announced that its capex will peak in 2013 and start falling in 2014 (from USD28bn in 2013 to USD26bn in 2014).

Although IOCs plan to cut spending, NOCs are exhibiting a mixed trend. Brazil’s Petrobras cut investment by USD16bn to USD221bn during 2014–18 from earlier plan of USD237bn during 2013–17 due to large petrol subsidies and higher debt. Total spending of large Chinese NOCs (PetroChina, Sinopec, and CNOOC) would grow modestly (up 3.1%, down from around 14% growth in 2013). Large Chinese NOCs are facing stagnation due to ongoing corruption investigations concerning high-level government officials and senior executives at various state-owned enterprises. Pemex, Mexico’s national oil company, expects to spend USD27.7bn in 2014 (85% on upstream), up from USD26bn in 2013 and USD23.6bn in 2012, as it tries to contain declining output.

North America leads global E&P spending in 2014

North America’s spending is expected to grow at over 7% y/y in 2014, while the international market (the Middle East, Latin America, and Russia) would grow at 6%. North America is expected to return to higher capital spending following subdued expenditure in 2013. During the year, spending in the US is expected to grow 8.5%, while that in Canada would increase 3.2%, following two years of decline. In the US, capex spending would be focused on increasing drilling efficiency as well as in the Gulf of Mexico, where new floaters are expected to be deployed.

Midstream: Unprecedented increase in US crude oil and shale gas production fuels infrastructure development

Hydraulic fracturing has enabled the US oil & gas industry to tap unconventional resources, leading to an eight-fold increase in US shale gas production during 2007–12, while US crude oil production rose 46.8% during 2007–13. The supply glut has created numerous logistical issues due to inadequate infrastructure, particularly in North Dakota and other emerging areas. US and Canada combined natural gas production is expected to reach 120 billion cubic feet per day (bcfd) in 2035 from 83 bcfd in 2014, with shale gas accounting for more than half of the total production over the next few years.

US midstream infrastructure spending expected to be USD641bn during 2014–35

According to INGAA, USD641bn is expected to be invested in midstream energy infrastructure during 2014–35 in North America, mainly due to higher natural gas production. INGAA previously estimated USD261bn of midstream expenditure for 2011–35. Spending on natural gas infrastructure would account for the largest share of USD313bn, followed by crude oil (USD272bn) and natural gas liquids (USD56bn). The Southeast region would witness the largest investment, followed by Canada, Central region, and Northeast. Furthermore, investments in pipelines are expected to have increased 260% to USD46bn in 2013.

China: Significant pipeline requirement to meet ambitious shale gas plans

To reduce dependence on fuel imports, the Chinese government announced in 2012 that it aims to produce 6.5 billion cubic meters of shale gas annually by 2015 and 60–100 billion cubic meters by 2020. In 2014, China halved its 2020 target of shale gas production to 30 billion cubic meters after facing exploration challenges. China owns the world's largest technically recoverable shale resource and is looking to replicate the shale boom that transformed the energy landscape in the US. Policymakers have also taken steps to reduce the country’s dependence on coal, which accounted for 66% of energy supply in 2013. The use of coal has led to inefficiencies and rising pollution rates, prompting policymakers to favor natural gas. We believe China’s ambitious plan to increase shale gas production would lead to significant spending in building pipeline infrastructure. China’s government plans to expand the network of natural gas pipelines to 62,100 miles by end-2015 from 22,400 miles in 2010 as compared with 210 natural gas pipelines across 300,000 miles in the US.

Downstream: Global downstream expenditure to reach USD333bn during 2014–20

According to GlobalData, global refining capital expenditure is expected to reach about USD333bn during 2014–20 due to the construction of efficient, large and complex grass-root refineries, such as cracking and coking facilities, mainly in Asia and the Middle East. Asia would constitute 46% of the global total as refining companies are increasing capacity in China, India, Vietnam, Indonesia, Malaysia, and Pakistan. The Middle East would account for 23% of total capital spending, with NOCs building capacity in Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates to increase their export of refined oil. China would be the largest single market, with 17% of global capex as it would construct large refineries. Increase in refining capacity, particularly in the Middle East and China, would significantly impact global refined products trade flow. Higher global refining capacity may result in oversupply in markets that the US serves, causing margin pressure.

Focus on midstream spending in the US and China

As oil companies are planning flat upstream spending for the next few years, the focus would shift to midstream. The US is expected to make significant midstream investment as it develops the infrastructure network to transport, process, and store hydrocarbons produced as a result of the shale gas boom. China would increase investment in building pipelines as shale gas production rises. Asia and the Middle East would account for the largest share of downstream expenditure.  

About the author(s)

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.