Back To The RBN Energy Story Earlier Today: The Eagle Ford

The RBN analysis: takeaway capacity in the Eagle Ford is four times production.

"Anonymous" posted that takeaway capacity was also overbuilt in the Bakken. I normally would not post something that doesn't link sources or add to the conversation, but I was curious if there were any sources out there to support the premise that takeaway capacity in the Bakken is overbuilt.

I think "anonymous" failed to read the entire RBN Energy analysis posted today. There are a lot of story lines there, which I will get back to. First, some conclusions reached by RBN Energy:

Which naturally begs the question – what is going on? Why would otherwise rational midstream companies build too much takeaway capacity if the production is not expected to support it for at least another 3 years? Our guess is that developing this infrastructure – relative to (say) building longer pipelines out of North Dakota was a lot less expensive.

There is also a lot of recycling and repurposing of existing pipelines versus greenfield construction in South Texas. That is because of the long history of oil and gas development in the region. Also the Eagle Ford development is so close to the large Gulf Coast refining market that midstream companies likely see this as low hanging fruit that they have to participate in for fear of missing the boat.

Part of the construction frenzy can be attributed to the Master Limited Partnership (MLP) tax structure that makes new investment in infrastructure relatively cheap – especially in an era of low interest rates (see Masters of the Midstream). The Enterprise/Plains joint venture decision and consolidation such as NuStar’s acquisition of TexStar in December 2012 and this week's acquisition of Copano Energy by Kinder Morgan suggest that midstream companies may have tempered their giddy enthusiasm over the past few months.

Eagle Ford production of crude and condensate close to the Gulf Coast refining market is increasing rapidly.

Infrastructure to get that production to market has shot up even faster – to the point where today the pipeline capacity is as much as four times the production.

That is one reason why you don’t hear much about rail transport out of the Eagle Ford – it is not required.

In the next few years Eagle Ford production can continue to increase comfortably without fear of capacity constraints. This is the opposite of the situations we have seen in the Bakken (where a feast of rail was required to overcome the famine of pipelines) or the Permian basin (that is still constrained waiting for new capacity to come online). The flood of crude expected in Houston over the next two years could exert downward pressure on prices. That will hurt Eagle Ford producers along with all others, but because they are closer to market their transport costs are lower and they will be in a better position to compete for market share on price. That will be good news for Eagle Ford midstream players because their revenues rely on volume flows not prices. Maybe there is method to the overbuild madness after all.

Let's break out some of these and other data points:

• first, folks need to look at the map: the Eagle Ford is pretty darn close to Houston; easy to build pipelines that short distance;
• folsk building takeaway projects generally don't follow through unless they have commitments to pay for them (see ONEOK story early, cancelling a pipeline because not enough commitment out of the Bakken)
• folks are forgetting the the tax structure of MLPs which RBN Energy mentioned
• developers learned from the Bakken experience about lack of infrastructure
• it's probably a lot less expensive to develop pipelines in Texas than North Dakota: a) many easements already in place; b) much shorter pipelines; c) can lay pipe year-round in Texas
• takeaway capacity in North Dakota is absolutely scalable; if it's unprofitable to ship by rail, the pipelines will see the benefit; 
• everyone complains about 30% of natural gas in North Dakota is being flared; that tells me there is no takeaway overcapacity in North Dakota
• the numbers will change, but if I recall correctly, as much as 75% of all North Dakota crude oil is still trucked at some point between wellhead and the refinery

But I think this is the big story:

• I link takeaway capacity with production potential, not the other way around.

If that's the case, there is going to be a huge amount of domestic oil and natural gas coming to the market over the next decade.