INSIGHT-Oil pipeline crunch shifts US shale race from drillbits to valves

Mon Jul 30, 2012 9:30am IST

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By Kristen Hays
    HOUSTON, July 30 (Reuters) - The U.S. shale oil revolution
can't be stopped, but it could be delayed by a potential
shortfall of 10-ton valves and giant pipeline pumps essential
for rebalancing markets upended by the surge in production. 
    Amid an unanticipated boom in inland oil output that turned
the domestic market upside down last year, firms from Enterprise
Products Partners to Shell Pipeline and Plains
All American have launched a $20 billion bonanza to
build, expand or reverse two dozen pipelines in the past year.
    But as they help effectively to switch the flow of oil from
the north to southern refineries and relieve the glut of
cut-price, landlocked crude, concerns are growing that the firms
that make key pipeline components may be straining to keep pace.
    "The supply chain hasn't quite caught up," said Terry
McGill, president of Enbridge Energy Co Inc, the U.S. division
of Canadian pipeline giant Enbridge Inc, which has some
$4 billion worth of U.S. projects on the books.
    Thus far, there are no signs of project delays or cost
overruns in what is the biggest build-out of oil and liquid
pipelines since World War II. 
    Executives say they are building in plenty of lead time to
produce dozens of multi-ton valves and massive pumps essential
for maintaining pipeline flow. Underutilized steel mills,
meanwhile, can rev up furnaces to forge the pipes -- which have
a diameter of up to 42 inches (107 cm). 
    But the task is enormous. After decades of moving U.S.
offshore or Middle East crude from the Gulf Coast to inland
refineries, pipelines must flow in the opposite direction to
accommodate surging output from Canada and shale oilfields such
as North Dakota's Bakken. 
    It all makes for a historic boom, said Larry Schwartz,
senior analyst for natural gas liquids at consultancy Wood
Mackenzie: "Midstream, which was the redheaded stepchild, is now
in vogue."
    
    RAMPING UP FAST
    Spending has already accelerated far faster than many
expected. A year ago, the Interstate Natural Gas Association of
America (INGAA) estimated North America would add 19,000 miles
(31,000 km) of oil pipelines at a cost of $31.4 billion by 2035
as production surged 50 percent to 12.7 million barrels per day.
    But industry monitor IIR Energy now estimates that $10
billion a year will be spent on crude oil pipeline projects in
2012 and 2013, four times the average of the previous seven
years.
    "You're not just connecting in to existing grids,"
Enbridge's McGill said. "The grid is being built."
    The biggest projects, those pumping 1 million barrels daily
or more, face the greatest risk of delay, experts say. Each of
the dozens of valves required on something like TransCanada
Corp's proposed $7.6 billion Keystone XL pipeline --
which has a 36-inch diameter -- usually must be custom-made.
    "We definitely consider ours an 'engineered to spec'
product," said John Starck, vice president of sales for M&J
Valve, a division of multi-industry manufacturer SPX Corp
 that operators say is a leading valvemaker for liquids
pipelines.
    "We do not actually build the product and keep it on the
shelf because each customer has their own unique set of specs."
    Meanwhile, the market is consolidating as bigger companies
snap up industry-favored manufacturers. That shrinks the already
small field of venders in the brand- and manufacturer-loyal
industry, threatening higher prices as demand swells.
    Operators saw prices for parts shoot up sharply in 2007 and
2008, the apex of the last huge pipeline build-out that brought
on thousands of miles of new natural gas pipelines.
    "The price just goes up the more projects are out there,"
said Leon Zupan, president of gas pipelines for Enbridge's U.S.
division. "Whenever you need big castings for pumps or valves,
there's only so many people who can do it."
    At SPX, valves and pumps make up part of its fast-growing
global flow technology business that the company has said it
expects overall to contribute $1 billion to sales this year. 
    SPX has given no specific sales data on parts involved in
the U.S. liquids pipeline boom. 
        
    CANADA TO BAKKEN TO OHIO...
    The first huge build-out in the United States came during
World War II when the federal government ordered a two-pipeline
system, the Big Inch and Little Big Inch, to carry oil and
refined products to the Northeast from the Gulf Coast. 
    The network, created largely to thwart German submarines
that had repeatedly torpedoed tankers along the Atlantic Coast,
later had its lines converted to carry natural gas. 
    Postwar prosperity generated industrial demand for natural
gas, and pipeline construction flourished for another 20 years.
Big one-off oil projects included the Colonial refined product
pipelines linking Gulf Coast refiners to the Northeast market
and the 48-inch, 800-mile Trans-Alaska Pipeline System (TAPS) to
bring newfound Alaskan crude to that state's coast.
    After that, pipeline construction slowed dramatically as
refinery construction stopped and steady oil production
necessitated only incremental improvements in the network.
    Then came the natural-gas shale frenzy that spurred a huge
wave of pipeline construction from 2006 until 2008, when the
financial crisis and a collapse in prices halted investment,
leaving some parts distributors nursing heavy losses.
    MRC Global Inc, the largest global distributor of
pipe, valve and fittings to the energy industry, recorded a
$46.5 million writedown in 2009 on an overhang of unused
inventory as customers dried up. The company declined to comment
on its business.
    Now the focus is on crude as drillers apply the same
hydraulic fracturing technology that upended the natural gas
market five years ago to neglected onshore oilfields, unleashing
a burst in production unimagined a few years ago.
    Output in the Bakken alone has surged from nothing to more
than 600,000 barrels per day in five years, and may double by
2015. 
    Texas is on pace to issue the most drilling permits since
1985 as output from Eagle Ford, the Permian Basin and the
Granite Wash surges. More liquids may emerge from the gas-heavy
Marcellus shale in the Northeast or Ohio's nascent Utica shale.
    Much of that increased production is in remote areas far
from refining hubs or in the Midwest and Northern Tier, turning
the traditional south-to-north flow pattern on its head.
Producers were forced to turn to costly rail, barge and even
truck tankers to move oil from the wellhead to refineries.
    "New infrastructure is going to be critical to push these
commodities around the country where they need to be," said
David Seaton, chairman and CEO of engineering company Fluor Corp
. "It's going to be the lifeblood of economic growth for
my lifetime."
    The aim is to eliminate the bottlenecks and reduce
transportation costs, shrinking the discount of benchmark inland
U.S. crude in Cushing, Oklahoma to global prices. At $15 a
barrel last week, the gap remains historically wide.
    The first such project, Phase I of the reversal of the
Seaway Pipeline to move crude from Cushing to the Texas coast,
began pumping on time in mid-May. It will require a host of
additional pumps and valves -- but no major pipeline sections --
to reach 450,000 bpd by the first quarter of 2013.
    It's not just oil pipes. Some $6.5 billion is being spent on
natural gas liquids pipelines needed to accommodate output
growth in propane, butane, hexane and other NGLs that emerge
from shale plays and feed hungry petrochemical complexes,
according to IIR. 
    Operators are optimistic, but on guard.
    "By carefully managing those rare instances when we've had
an issue with a valve or a pump, we have been able to complete
the vast majority of our projects on time or even ahead of
schedule," said Leonard Mallett, senior vice president of
engineering for Enterprise Products Partners. His company is one
of the largest U.S. operators with planned projects totaling
some $7 billion across pipelines, terminals and storage.
    
      
    
    10-TON VALVES
    As manufacturers see orders for critical inputs increase,
some are hiring more workers, from welders to salespeople.
Others are soaking up current capacity to produce more by adding
shifts and some seem to be expanding, cautiously.
    A valve for a 20-inch pipeline can weigh 3,000 pounds (1,360
kg) to 4,100 pounds, while one for a 36-inch line can weigh
15,500 to 19,000 pounds, depending on whether flanges are
included. The biggest valves for the largest pipes are heftier,
plus they cost about $120,000 each.
    It can take 20 to 22 weeks of lead time to build a 42-inch
valve, said M&J Valve's Starck. Enbridge's McGill said for big
pressure pumps, "it would be a year."
    John Lenander, vice president of oil and gas valves for
another major valve and pump supplier, Dallas-based Flowserve
, said timing depends on the level of specialization, the
amount of valves needed, and pipe size.
    For example, 10 valves for 200 miles (320 km) of 42-inch
pipe could be supplied in six to eight months. But 60 valves for
1,200 miles of 42-inch pipe would more likely be quoted with
partial deliveries starting in six months, with everything
completed in about a year, he said.
    "We've been putting a lot of additional resources into
supply-chain management, project management and engineering," he
said. Flowserve, which reports second-quarter results on
Tuesday, is also expanding plant capacity, he said, but declined
to provide details.
    Flowserve has said U.S. and Canadian unconventional
resources -- such as shale and tight oil and gas production --
have led to "significant project activity" in its North American
oil and gas, chemical and power markets. The company does not
break out valves and pumps for U.S. liquids pipelines.
    Starck said M&J, whose parent SPX reports earnings on Aug.
1, has bulked up its manufacturing workforce slightly, but so
far has mostly worked to optimize existing plant capacity.
    ClydeUnion Pumps, a leading pumpmaker that SPX bought last
year for $1.25 billion, has no plans to expand manufacturing
capacity, confident its five factories in North America and
Europe can meet demand. 
    "We can see ahead just how our capacity is, and do what we
need to do whether it be one shift or two shifts," said Dick
McAdam, vice president of sales in the Americas for ClydeUnion.
    
    SOME COMPLAINTS
    Some competitors to the top firms say builders have begun to
complain about long lead times, even at manufacturers with which
they regularly work. 
    "You need to diversify your supplier base. That's being done
right now, and it should have been done a long time ago," said
Elis Zhonga, a senior U.S. sales representatives for Valvitalia,
which distributes Italian- and Chinese-made valves. He said the
company is hiring more sales and distribution staff at its U.S.
operations in response to increased demand.
    But Zhonga said that despite the complaints, pipeline
companies are loyal to tried-and-true suppliers, and he doesn't
expect that to change even if manufacturing times lengthen.
    The most basic raw material for pipelines and a majority of
mainline valves -- steel -- remains plentiful, operators say. 
    U.S. steel production is at about 75 percent capacity,
according to the American Iron and Steel Institute. About 7.2
percent of steel production went to the energy industry in 2011,
and that share is expected to grow this year.
    Capacity is rising as well. Industrial Info is tracking more
than $1.7 billion in projects to build mills designed to produce
pipe in North America, much of it by foreign companies including
China's Tianjin Pipe and India's Welspun Gujarat Stahl Rohren.
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