The $250 Billion Problem That's Holding Back American Energy Independence


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Oil and gas producers struggle with a number of issues, but there is one in particular that is really holding them back: lack of infrastructure. By some estimates, this is a $250 billion problem for the industry. That is the amount of midstream infrastructure investment that's required to get the record volumes of oil and gas moving from production basins to market centers. In fact, this past year a number of producers have pointed out that lack of necessary infrastructure is costing them valuable production. In some cases this production is simply being shut in; however, as fellow Fool Tyler Crow recently pointed out, lack of infrastructure is actually costing Bakken producers more than a billion dollars each year.

One producer that recently acknowledged its infrastructure issues is Magnum Hunter Resources In fact, in the last quarter, the company had 1,873 barrels of oil equivalent worth of production per day shut in due to infrastructure issues. That would have boosted its production for the quarter by another 12%, which is no meager sum for the small oil and gas producer.

Part of the problem is of the company's own creation; it simply discovered more natural gas liquids than it had previously estimated that it would find. While that's a good problem to have, it still was a drag on the quarter -- the company's midstream subsidiary needed to invest in additional equipment as well as wait for new permits to be issued before its added production could start flowing.

In addition to the lack of pipeline capacity, Magnum Hunter had to wait for the processing capacity at the MarkWest Mobley plant to be expanded to handle the additional volume. Currently, the plant has enough planned capacity, so this won't become problematic for Magnum Hunter for at least the next year.

One of the bigger issues, though, is getting these volumes of natural gas liquids to customers; its estimated that more than 1.4 million barrels of liquids per day will be produced in the Marcellus and Utica by 2020, but there is just 400,000 barrels per day of takeaway capacity currently under construction. MarkWest is one of a number of midstream companies working on a long-term solution. The company recently announced a joint venture with Kinder MorganPartners on an natural gas liquids pipeline to the nation's Gulf Coast petrochemical center. The project, which will also include a processing complex in Ohio and fractionation facilities on the Gulf Coast, won't be operational until the fourth quarter of 2015.

It's the third proposed project that is designed to link the Marcellus and Utica to the Gulf Coast. The first project announced was Enterprise Product Partner's ATEX Express. The key to getting it off the ground was the fact that about 70% of the route uses existing pipeline which has been repurposed for the project. Not only does this limit the environmental impact of the project, which is important in light of the issues that the Keystone XL has encountered, but it also enables Enterprise to get the work done faster and cheaper. Similarly, MarkWest and Kinder Morgan's pipeline will convert 900 miles of existing pipe while building another 200 miles to get the project into service.

While the issues in Appalachia have led to lost revenue and have crimped profits, it's not the only region that has been plagued by infrastructure problems. Producers in the Bakken have really had a rough time getting natural gas production into pipes. In fact, Magnum Hunter noted that it was forced to flare 12 million-15 million cubic feet of natural gas per day last quarter. Its midstream partner, ONEOK Partners , has encountered significant problems in the process of connecting all of its wells. It's so bad that Glenn Dawson, the president of Magnum Hunter's Williston Basin unit, has called the process "very slow and painful". The plan is to have the gathering system complete by the third quarter of this year.

Clearly, lack of infrastructure is holding back the production of oil and gas. Midstream companies aren't the ones to blame -- they are investing billions to move these projects forward. In fact, ONEOK has already announced more than $5 billion in growth projects through 2015 and has another couple of billion dollars in projects that it has yet to announce. Meanwhile, MarkWest is planning to invest up to $1.8 billion this year alone, while Kinder Morgan has more than $13 billion in growth opportunities over the next five years.

While some blame can be levied on a slow permitting process, the real obstacle is that production is moving faster than the infrastructure to handle it can be built. This could spell opportunity for investors because midstream operators will need access to capital to move these future projects forward.

This is why finding the right plays while historic amounts of capital expenditures are flooding the industry is critically important to padding your investment nest egg. To help you find the right plays, the Motley Fool is offering a comprehensive look at three energy companies that are best positioned to profit from this transformation time in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

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Fool contributor Matt DiLallo owns shares of Enterprise Products Partners L.P. The Motley Fool recommends Enterprise Products Partners L.P. and ONEOK Partners, L.P. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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