overbuild

Crude production in the Niobrara shale formation is focused on two areas, the Denver-Julesburg (DJ) Basin in Northeast Colorado and the Powder River Basin (PRB) in Wyoming. Production has expanded in both basins (current output is about 435 Mb/d according to the Energy Information Administration) but much of the recent volume growth has come from the DJ basin. Expectations as recently as last year that production would expand to over 700 Mb/d in the next 4 years have been tempered by the crude price crash. A couple of large pipeline projects prompted last year by those production expectations have been cancelled since but others are still being built. Today we assess crude takeaway infrastructure in the DJ basin.

Another round of big changes are coming to the markets for natural gas, natural gas liquids (NGLs) and crude oil. The surging production growth that has characterized these markets has slowed and in some basins is starting to fall as the mass exodus of drilling rigs begins to take its toll on shale production.  But what about all that infrastructure that has been and continues to be built?  Billions of dollars are going into pipelines, processing plants, petrochemical plants, terminals, storage, etc. based on a much higher production growth scenario than now seems likely.  Where are the opportunities in this new energy market reality? The answer depends on a discernable pattern of events tied to production volumes, infrastructure capacity, commodity flows and project expenditures. Those are the themes of our latest State of the Energy Markets Conference scheduled for October 28, 2015 in Denver, CO as well as the subject of today’s blog – also an advertorial for the conference.

Overbuild!!! The word strikes at the heart of any midstreamer.  Call it the curse of capacity.  There is a shortage of capacity to do something, like transport crude oil, or store natural gas, or process ethane.  You see the opportunity and jump on it, developing infrastructure where it is needed.  But you are not the only smart person out there.  Others jump on the opportunity as well.  And before you know it…. Overbuild!!! Too much capacity has been built and the economics that supported the new infrastructure have been crushed. 

And where do you think the foul word has been used most often lately?  You guessed it.  That island of capacity shortage, the Bakken.   Yes, capacity is still short today.  But there are a lot of projects in the works.  So many pipeline and rail projects out of the Bakken that an overbuild is being predicted by some of the most knowledgeable folks in that market.  In an overcapacity situation it is the high cost alternative that loses out.   And that is rail.