Sweet Dreams (Are Made of This) - Midstreamers' Critical Role in the Energy Transition

The Shale Revolution created an unprecedented need for midstream infrastructure of every sort — gathering systems, processing plants, storage hubs, takeaway pipelines, fractionators, export terminals, and more — all with the aim of connecting new hydrocarbon supply to demand. Throughout the 2010s, the scope and urgency of this midstream build-out opened up tremendous opportunities for the master limited partnerships, private-equity-backed developers, and other entities with the management skills, financial wherewithal, and dexterity to make these massive projects happen. Now, much of the Shale Era’s required new infrastructure is in place — and COVID and ESG have slowed new-project development to a crawl — putting many MLPs in a bind and leaving private equity firms to wonder where they should invest their money next. Well, there may be an even better set of new opportunities on the horizon — all related to the coming energy transition — and, as it turns out, midstream developers with hydrocarbon experience are uniquely positioned to lead the way. In today’s RBN blog, we discuss how the project-development model that drove the midstream sector’s growth over the past decade is poised for potentially lucrative re-use in the 2020s and beyond.

The midstream sector in the U.S. oil and gas industry has been evolving continuously since the 1820s and ‘30s, when natural gas was first piped to light streetlamps in Fredonia, NY, and Philadelphia, and the 1850s, when oil produced in western Pennsylvania was shipped to market in wooden barrels on wagons and flatboats. By the 1860s, crude was moving by railcar and pipeline, and by the early 1890s the first long-distance gas pipeline was hauling gas 120 miles from central Indiana to Chicago. Soon thereafter, scientists and other folks started figuring out what to do with NGLs — American Gasol Co., the first commercial marketer of propane, was established in 1912 (though it took another 42 years for the first portable gas barbecue grill with a 20-pound propane cylinder to go on sale!).

The very definition of midstream also has been evolving as the industry becomes more complex and interconnected. Today, the midstream sector involves everything that happens between the wellhead and the point of consumption (see Figure 1): gathering, treating, processing, transportation (trucks, railroads, pipelines), storage, fractionation (for NGLs), liquefaction (to make LNG), exporting, and marketing. Just as important to our discussion today, the types of corporate entities that actually “do midstream” has been changing too, especially over the past three or four decades. And, as we hinted at in our introduction, many of the midstreamers that now dominate the sector have the infrastructure-development experience, financial resources, and entrepreneurial spirit to play major, if not leading, roles in developing the wide variety of projects — renewable fuels, hydrogen, ammonia, carbon capture and sequestration, etc. — that will drive the coming transition to a lower-carbon world.