By Bryan Livingston
Managing Partner and CEO
Demand for experienced third-party oil & gas pipeline integrity services is at an all-time high, as pressure on pipeline operators to address public safety concerns, the costs of maintaining in-house integrity staff and other factors have boosted demand.
Growth is also being driven by a rise in domestic oil & gas production, the ongoing shift by utilities to natural gas-powered generation and other economic and regulatory factors. Rising business for third-party pipeline integrity services is driving renewed interest in merger and acquisitions for companies that offer these services. Financial and strategic buyers are looking for opportunities to grow their presence in this attractive niche market.
Almost 500,000 miles of interstate pipelines crisscross America, carrying crude oil, petroleum products and natural gas, according to the Manhattan Institute. This extensive infrastructure network is heavily regulated by the Department of Transportation via the Pipeline and Hazardous Materials Safety Administration (PHMSA), the Federal Energy Regulatory Commission (FERC) and the National Transportation Safety Board (NTSB.)
PHMSA has drafted and is in the process of establishing new safety rules, which, although not yet in effect, will eventually put more pressure on oil & gas companies to improve their pipeline integrity programs and may prohibit self-inspection for some operators. A complicated and fluid regulatory environment is yet another reason energy commodity producers and transport companies are tapping third parties to manage pipeline safety. Energy utilities have come under increased scrutiny in recent years due to several high-profile pipeline accidents and failures. Although moving gas and oil through pipelines is the safest mode of transport, all are at a risk of a commodity release.
Below are the key reasons we anticipate growth opportunities to continue in this niche market:
- Shale gas formations have required new pipeline investments and infrastructure, boosting work by third-party pipeline integrity companies to ensure safe and reliable transmission and distribution systems. Pipeline construction and corresponding pipeline integrity work is expected to grow and be sustainable for several decades to come as domestic production rises.
- The build-out of natural gas-powered generation stations by electric utilities is requiring additional capacity and larger pipelines as utilities retire coal-generated power plants. Electrical utilities expect to increase natural gas-powered generation by 11.2 gigawatts this year and 25.4 GW in 2018, according to the U.S. Energy Information Administration. Monthly electric generation from natural gas plants exceeded that from coal for the first time in April 2015.
- New natural gas pipelines are being built to supply existing and future liquefied natural gas export facilities.
- New transmission pipelines, such as the Atlantic Coast Pipeline, will be built to serve multiple public utilities and growing energy needs along the East Coast.
- Aging pipelines that have been in the ground for 50 years need to be repaired, replaced or modernized, a rolling process that could take 30 years.
Last year, FERC certified 17.6 billion cubic feet per day of new natural gas pipeline capacity. During the first two months of 2017, it certified 7 Bcf/d, according to the EIA. Receiving a certificate is one step in the process of building a pipeline and doesn’t mean all certified pipelines will come online in the same year they are certified. Underground Construction’s 2016 survey of pipeline construction indicates 34,027 miles of pipeline are planned or under construction in North America.
Demand for third-party pipeline integrity work should make this a strong and reliable niche subsector of oil & gas for many years to come.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.