There are a variety of ways to invest in the energy infrastructure industry, all with different levels and types of exposures, but as with any investment, it’s important to understand the risks. The energy infrastructure industry is one that carries unique and potentially complex risk, and while most scenarios are very unlikely to happen, it is important to understand the potential risk involved in order to make the best-informed decisions. Alerian helps break down the risks when investing within EI in an educational guideline for investors and advisors considering EI exposure in their portfolios.
Commodity Price Sensitivity
The first risk to consider is the sensitivity to commodity prices that the energy infrastructure industry inherently has; as the industry is only the means of shuttling a product, in this case oil and gas, its revenue isn’t directly linked to the prices of the commodities being carried. Midstream companies are, however, indirectly affected by the price movements within the energy sector, as they tend to get categorized in with the overall performances of the energy sector and commodities.
When commodity prices fall drastically, it can cause upstream companies to reduce drilling, creating a domino effect that culminates in less midstream infrastructure being needed. Between the indirect link to commodity prices and energy sector performance, and the direct link to a reduction in demand for pipelines, the EI industry is one that is sensitive to price movements within commodities.
Some of the biggest primary pipelines being used today are also some of the oldest, having been built in the 1950s and 1960s. Older pipelines coupled with large oil spills and gas leaks that bring public pressure and negative attention to the industry have created a concern for the environmental safety and soundness of investing in EI.
Today, there are new technologies that work to more accurately and frequently monitor the physical state of pipelines, enabling better upkeep and preventing leaks and spills. As things stand, pipelines are still considered the safest way to transport natural gas and oil across long distances, and with continued maintenance, the risk to the environment continues to be reduced.
While the renewable energy transition will ultimately prove the largest risk to oil and natural gas transport needs, it’s a transition that still remains many years off. The technologies that will allow for societal conversion to a completely alternative source of energy will take time to both discover and implement; in the meantime, the global demand for hydrocarbon-based energy remains high.
Once petrochemicals are eventually phased out, if a new source replaces them that is liquid or gaseous in nature, there could be a very high probability that the existing pipeline infrastructure might be converted over and used to carry those new sources. For midstream companies, there is great potential for longevity beyond the renewable energy transition, and there is expected to be a steady demand until that time.
Gathering permits for a new pipeline is an arduous process, as both state and federal government approval is required. Add to this the environmental impact studies that need to be completed first as well as possible eminent domain complications, and it’s a process that can take a lot of time, with many setbacks and delays.
Every state has different regulations, and as pipelines often cross many states, the difficulties can compound; if a pipeline fails to gain approval, costly and time-consuming re-routing would potentially need to happen. Setbacks and delays can cause costs to run over and drive up the price of the overall project, making it a less profitable venture for investors, on top of the risk of a pipeline failing to get built and investment money being lost entirely.
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