Pipeline Build-Out Boosted Texas' Economy in 2013, but Future Impact is Murky Given Crude-Oil Price Collapse

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--About 59,000 miles of new crude oil, natural gas and natural gas liquids (NGL) pipelines have been built in the last three years in Texas, at an aggregate cost of about $73 billion, according to the Texas Pipeline Association (TPA) (Austin, Texas). That group projected an additional 50,000 miles of new pipe will be needed in the Lone Star State over the next 10 years to keep up current rates of production for crude oil, natural gas and NGLs.

Industrial Info is tracking a total of 68 active pipeline projects in Texas, with a combined total investment value (TIV) of about $5.1 billion. This sum includes 48 crude-oil projects valued at $3.1 billion, six NGL projects valued at $1.28 billion, and 14 natural gas pipeline projects valued at slightly more than $700 million.

It costs an average of $1.26 million to construct each mile of a pipeline, so pipeline developers will be spending about $63 billion over the next 10 years to expand Texas' hydrocarbon pipeline network, TPA President Thure Cannon and Bradley Ewing, an energy economist at Texas Tech University (Lubbock, Texas), predicted in an interview with Industrial Info. That sum does not include future outlays to construct midstream plants, like cryogenic gas-processing facilities.

Earlier this year, TPA released a study conducted by Ewing and three TTU colleagues on the economic contributions of the state's pipeline network. That study, "Current and Future Economic Impacts of the Texas Oil and Gas Pipeline Industry," was released this summer, just as prices for West Texas Intermediate (WTI) crude oil prices were peaking at around $105 per barrel. Those prices have since fallen about 50%, to a recent level of about $56 per barrel. The study focused on documenting the economic contributions the pipeline industry made to Texas in 2013, as well as projecting possible economic impacts of the pipeline industry on the state over 2014-2024, under three different growth scenarios.

The TPA study found that the pipeline industry's construction and maintenance activities created $33 billion in economic effects in Texas in 2013. The study measured the total revenue created from pipeline activities, including direct, indirect and induced economic effects. The "direct" category includes a pipeline's payroll, purchasing and construction outlays. "Indirect" and "induced" economic effects refer to the economic impact pipelines have on upstream and downstream industries.

According to the study, the pipeline industry also created more than 165,000 jobs in Texas last year, generated more than $18.7 billion in additional gross state product, and created an inflow of more than $1.6 billion to state and local government tax coffers.

"Texas' pipeline industry is a key component of our energy infrastructure and our nation's ever-growing energy needs," TPA's Cannon said in a statement when the study was released this summer. "And, due to a dramatic increase in the state's oil and gas production, the demand for additional pipelines is expected to continually increase in the coming years. The communities that are home to pipeline projects are perfectly poised to see economic benefit from the industry in terms of more jobs and increased tax revenue."

TTU's Professor Ewing added, "The Pipeline Industry verifiably underpins the exploration and production industry, and its impact on state funds is not only substantially measurable but growing in scale."

Looking forward, the study established three scenarios--high growth, moderate growth and low growth--to project the annual average economic effect of the Pipeline Industry in Texas through 2024. When the study was released, oil prices were in the "high" scenario--in excess of $100 per barrel. If that continued as the average selling price of WTI between 2014 and 2024, it would generate a total of about $454.3 billion of direct, indirect and induced economic effects to Texas (measured in today's dollars). About 2.3 million jobs would be sustained over the 11-year period of that scenario.

The "moderate growth" scenario contained in the study envisioned oil prices in the $70 to $90 per barrel range, and gas prices in the $4 per million British thermal unit (MMBtu) range, with some allowance for oil price volatility. Under that scenario, the TPA report projected cumulative, 11-year economic effects of about $392 million. Under that scenario, about 2 million jobs would be created between 2014 and 2024, the study forecast.

Still, under the "low growth" scenario, where oil prices "collapse" to between $50 and $60 per barrel, the pipeline industry would generate an 11-year total of about $330 billion of economic effects, measured in 2014 dollars. Roughly 1.65 million jobs would be sustained over the 2014-2024 period, if oil prices averaged between $50 and $60 per barrel over that time, the study found.

In their interview, Cannon and Ewing were reluctant to speculate what oil prices would average over the 2014-2024 period. Right now, they are squarely in the "low price forecast" scenario, but Cannon said, "I don't think prices will stay at their current range. And I don't see $40 a barrel as the sustained average prices over the next 11 years either. Prices are going to bounce around a lot." The study did not consider a scenario where oil prices averaged less than $50 per barrel.

"Our study was unique in a couple of aspects," Ewing said. "In general, there has been little understanding of the economic effects created by pipelines. We wanted to fill that gap. And our study blends engineering and economics. Typically, it's been one discipline or the other making the forecasts: engineers with economists, or economists without engineers."

Ewing had three co-authors for the study--one is also an economist, while the other two teach in TTU's college of engineering. One is a member of the petroleum engineering department, while another is a member of the construction engineering department.

Despite the state's build-out of its pipeline network in recent years, "the infrastructure remains stressed and in need of additional pipeline and processing capacity to sustain current levels of production," Cannon said. Texas' pipeline networks carrying all three forms of hydrocarbons--crude oil, natural gas and NGLs--are all stressed, but Cannon said the segment most in need of added investment was crude-oil pipelines.

On the other side of the ledger, five Texas pipeline projects with a total investment value of $220 million have been cancelled since July. Four of these projects were $30 million pump stations associated with the Permian Express pipeline, and the fifth was a $100 million conversion of the Salt Flat gas pipeline to carry crude oil. The Salt Flat conversion project was cancelled due to market conditions, while the Permian Express pumping stations were cancelled due to other constraints.

"Pipelines are long-term, high-cost projects, which means they demand far-sightedness and a high tolerance for risk," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipeline and Terminals industries. "I imagine a 50% drop in the price of crude oil would have an impact on the economics of crude-oil pipelines. And if history is any guide, a high percentage of these projects--maybe 50%--would not kick off as scheduled anyway. But developers don't make their decisions based on yesterday's price of crude oil. I imagine we're still in a bit of a 'wait and see' period, until a price floor emerges. We're not there yet. Stay tuned."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.