Falling Dominoes

“Rusty” Braziel runs RBN Energy, a firm that provides very useful research on production trends in U.S. hydrocarbons. Their website maintains a regular blog and also offers deeper analysis on specific topics. They reach over 20,000 industry executives, and we find many useful insights in their work.

The Domino Effect: How the Shale Revolution is Transforming Energy Markets, Industries and Economics was published early last year, coincidentally just a few weeks prior to the low in the energy sector’s bear market that was largely due to U.S. hydrocarbon output. Like his blog posts, Rusty’s book is well researched and highly engaging. He describes events as dominoes falling against one another in a seemingly inevitable sequence. The first domino was caused by improvements in technology that drove significantly enhanced returns from shale-sourced natural gas production. The consequent abundance drove the price of natural gas lower, inducing Exploration and Production (E&P) companies to switch to more profitable Natural Gas Liquids (NGLs), which were often found with or nearby “dry” natural gas. Lower prices followed for NGLs, and activity then shifted to crude oil. The resulting increase in U.S. production drew the world’s attention to the Shale Revolution as crude slumped in 2014-15.

The dominoes continued, creating a resurgence in U.S. petrochemical investments funded by cheap inputs such as ethane, an NGL. Liquefied Natural Gas (LNG) import facilities were converted to export, since U.S. natural gas prices fell to among the lowest in the world. The book’s explanation of events as inevitably linked provides a compelling framework with which to examine huge shifts in world energy markets.

There is some interesting history; in 1942 the success of German U-boats at sinking oil tankers traveling from the Gulf Coast to New York harbor prompted the rapid construction of pipelines from Texas up to Philadelphia and New York. One of those pipelines, dubbed “Big Inch” because of its 24 inch diameter (double the diameter of the largest to date), was converted from a crude line after the war to carry natural gas. Today it is the TETCO pipeline operated by Enbridge (ENB). Another, smaller pipeline from the same era named Little Big Inch carried refined products. It’s now the Products Pipeline System (formerly known as TEPPCO) and is run by Enterprise Products Partners (EPD). These represent compelling examples of the longevity of pipelines, showing that properly maintained infrastructure that’s still in demand can steadily appreciate in spite of GAAP accounting that allows for depreciation.