With hundreds of miles of shoreline and the world’s leading Navy and Coast Guard, the United States is the globe’s most logical stable exporter of energy. Too bad Congress effectively banned exports a generation ago. Lifting the ban won’t be enough to displace the Venezuelas and Irans of the market, though. Stifling regulation—and the threat of more to come—on the means of moving the products of innovative technology like fracking is a critical check on an otherwise burgeoning industry.
Missing from many stories about America’s energy revolution is the industry’s midstream sector. This is the chain of transportation and rough processing of raw oil and natural gas, and the link between the upstream and downstream sectors. Whereas the term upstream concerns the actual extraction process and downstream refers to final refining and the creation of certain consumer products, midstream is infrastructure and logistics.
Midstream is not just pipelines: Rail and trucking systems and processing and pumping centers are getting a makeover in the wake of the American gas renaissance. Prior to 2012, U.S. gas and oil companies focused primarily on domestic or foreign sources of oil (upstream) and final processing and delivery to the customer (downstream). With more natural gas reserves being discovered and harnessed in the continental United States, a robust midstream infrastructure is now essential. Everything from gas prices to the domestic job base is at stake.
The most high-profile midstream issue is the Keystone XL pipeline, which remains a lightning rod despite strong House and Senate approval. Keystone’s final phase has been stalled for seven years during the height of the recession. President Obama’s Keystone veto this session is just the latest proof the project and its economic benefits are not among the president’s priorities.
But with oil and natural gas flowing out of the shales of Canada and the barrens of the Dakotas, voters and policymakers alike should realize that without a modern midstream infrastructure, our energy influence is effectively neutered. The United States is the world’s leading gas producer, but this materiel is useless if the industry cannot transport it to where Americans need it.
Russ Girling, CEO of TransCanada, the midstream firm constructing Keystone, is flexible about logistics, saying, “We are approaching 1.2 million barrels per day of rail-loading capacity—nobody has waited for Keystone XL pipeline to get built.” Although pipelines have been acknowledged by both industry and the EPA as significantly more efficient and less risky forms of oil transport, U.S. federal trepidation is forcing the company’s hand. The Keystone pipeline would take 800,000 barrels a day off train tracks, putting midstream facility jobs in the United States rather than in Canadian rail systems.
If pipelines and energy infrastructure facilities are not built and instead tarred and feathered in the public eye, progress will be impossible. A nascent sector is more easily targeted than an established one. Publicly torpedoing a major transnational energy deal discourages not only investors and policymakers, but also job creators. The last two years’ increased gas production is not just a boon at the pump: Aside from tens of thousands of construction jobs, upgrading energy infrastructure is constructing careers.
Far from the Canadian border and almost directly between Houston and New Orleans, South African energy company Sasol is turning gas into jobs. “Plants use natural gas like a bakery shop uses flour,” according to Dan Borne, president of the Louisiana Chemical Association. Local environmental activists and national nonprofits are demanding more regulation of midstream plants like the $8 billion ethane cracker Sasol is currently constructing.
Ethane crackers—processing facilities for raw natural gas—are essential for breaking apart gas on the molecular level to produce ethylene, the building block for hundreds of modern plastics and chemicals. This midstream plant in southwest Louisiana provides ethylene to facilities downstream in the chain and is ideally situated near the refinery hub of Houston. Surrounded by states that have had little or no growth since the recession, Louisiana has seen a 3 percent job growth rate since U.S. hydraulic fracturing started, more than double the national average. While the average factory/production job in the state pays $40,100 per year, the Sasol plant will permanently employ at least 500 workers earning $80,000 annually, in addition to 5,000 construction workers during peak times.
From the workers manning ethylene crackers and gas-to-liquids plants to the manufacturing jobs necessary to make and maintain them, these facilities along the supply chain will yield thousands of jobs. Furthermore, cheaper energy and a wider network of pipelines means entrepreneurs and heavy manufacturing have the option to keep jobs in the United States, including the parts of the country recovering most slowly from the recession.
In the heartland of Oklahoma, a combination of oilfield work and pipeline construction has created an income spike visible in IRS records. Locals say new shale techniques drove change in their economy: County average filings rose $20,000, from $66,000 to $86,000. Having opened a mobile home park a few years prior, Medford, Oklahoma, resident Gary Aebi specifically cites the influx of industry workers: “Oil, pipeline construction—I had a lot of welders in the park.” While pipeline welding (like all construction jobs) is not permanent work, increased economic activity in towns like Medford often leads to further development including new businesses and other construction work.
Back east in Pennsylvania, the last few months’ decline in global crude prices is hardly affecting the expectation of state growth from hydraulic fracturing. Some natural gas prices there are about 30 percent lower than in the rest of the country, thanks to the Marcellus Shale reserve. This price difference may be caused not only by a localized supply glut, but also by the inability to take advantage of price differences in the U.S. market. Once again, a lack of transport logistics means a lost opportunity for interstate trade.
Drilling company Seneca Resources spokesman Rob Boulware views the lack of local and interstate pipelines as “a turnpike that no one is driving on, but people are lined up at the gate to go through.” Further down the line in Philadelphia, entrepreneurs are looking to jumpstart the city with its own energy renaissance and rekindle industrial manufacturing. Philadelphia Energy Solutions CEO Phil Rinaldi’s experience typifies both why there is a perception of an oil “bust” and why midstream expansion is significantly overdue. Having inquired with the city’s energy utility about the availability of gas produced in the state’s northwest, he was told none was available to supply potential factories. He was astounded: “All of the delivery systems are absolutely full. The gas is abundant and we can’t get it because the highways are clogged.” Pipelines do not have traffic jams or spills, and more local refineries and pumping stations mean a regular and reliable delivery time.
Whether it’s small towns across the country suddenly flush with workers and cash or major cities looking to regain the glory of lost industry, it is clear that new gas and new techniques are limited by the ability to deliver energy. The boom did not reach anywhere near peak demand or production. The bust is not a bust at all, but merely a new national industry hitting an infrastructure and regulatory choke point. American industry has proven its capabilities; building pipelines is only limited by state and federal regulatory authorities. From national-level vetoes of Keystone to small-town politics and protests in rural Pennsylvania, government and industry need to cooperate to expand America’s latent energy network.
While drilling/extraction sites and oil refineries are most present in the news cycle and collective consciousness when Americans think “energy,” it is midstream operations that enable both. This sector is the most at risk: Pipelines and plants can only provide jobs if they are authorized, not politicized, and not under constant threat of frivolous lawsuits. Gas processing centers (and their inherent employment bonus) do not exist without an expanded energy transit network. Government weakening of the link between upstream production and downstream refining directly ignores the interests of the American people.
And the industry is perennially playing defense. The American Petroleum Institute’s CEO Jack Gerard announced in January that API is forming a new midstream department targeting the unique issues facing the sector. Representing the needs of U.S. energy companies, API serves as a bellwether of potential threats to one of the country’s most successful industries. Gerard declared that “in order for America’s oil and natural gas renaissance to continue, we need a world class infrastructure system to deliver that energy to consumers.” He is correct: It is consumers who miss out if regulations and politics strangle midstream development.
From CEOs to local business-owners, the tone of the pipeline debate in the United States is undoubtedly pragmatic. Americans still have much to lose, however, if a strategy of Canadian railroads supplants one of U.S. infrastructural growth. Is scoring political points with the environmental lobby more important than kindling the rebirth of energy production and manufacturing in the United States? We have plenty of gas and oil wells and strong industrial capacity in refining and manufacturing. It is time to fill the gap. With hindered development in the logistics and transportation sector, American energy will be stuck, ironically, midstream.
Theodore E. Generous is a recent Johns Hopkins graduate with experience in energy research and finance in Russia and Ukraine.
