business development
DEPT
by Thomas V. Costantino & Thomas Edwards
UNLOCKING
THE VALUE IN
MIDSTREAM
Private Equity – Fueling the
Economic Engine
The capital needs of midstream oil and
gas infrastructure development are often
overshadowed by the staggering scale of the
shale oil plays emerging across the United
States. Over the next 20 years, Deloitte
estimates capital spending of $133 to $210
billion for the infrastructure development
needed to keep up with new production
from the prolific shale plays.
The need for new infrastructure development is increasingly visible. One-third of
the natural gas produced in the Bakken is
flared. Despite record natural gas production in the northeast, huge spikes in natural
gas prices were experienced during the
recent unusually cold weather.
The macro case presents a simple, posi-
10
tive investment thesis for midstream assets.
However, the long-term nature of these investments necessitates a diligence process in
both investment strategy and selection. The
midstream sector of the oil and gas industry
includes a variety of investment options in
transportation, storage and processing.
Investors are Searching
The amount of capital needed to satisfy
development may appear burdensome. So
far, the current low interest rate environment is likely to drive sufficient dollars into
these investments in the near term as investors search for yield. The Master Limited
Partnership (MLP) has become a popular
entity among investors as the MLP is forced
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to return a large portion of earnings. The
Federal Reserve has shown no signs of
significantly increasing interest rates, so this
source of capital is unlikely to diminish in
the near future. Similarly, investment capital
is steadily flowing into private equity funds
focused on midstream asset acquisition and
development.
Natural gas markets in the Northeast
are experiencing a huge bottleneck. A dearth
of pipelines is depriving consumers of the
full benefits of low-cost energy. Although
the wells in Pennsylvania are practically in
the backyard of the Northeast and MidAtlantic states, pipeline companies are still
working to connect the gas fields to the utility pipes beneath towns and cities.
The profiles of the projects proposed
in the Northeast and Mid-Atlantic states
follow the typical trend in midstream
development funding. Public and institutional capital sources tend to fund the major
infrastructure pieces – trunk lines and LNG
export terminals – while private equity
typically participates in projects requiring
less than $500 million – regional gathering
systems and rail terminals.
The Marcellus-Utica Shale is estim ]Y