In mid-May, constant construction kicked up dust at Kinder Morgan’s terminals along the Houston Ship Channel east of the city. High above the activity on the ground, workers made their way along the tops of a dozen or more new, multimillion-dollar storage tanks. Oversized construction cranes stretched skyward. Scaffolding held new pipe next to dirt roads. 

One of the planned facilities—at press time just being scratched out in a sandy field—will connect to the Kinder Morgan Crude & Condensate (KMCC) pipeline after a piece is built hundreds of feet under the channel.

The pipeline ends at what is commonly referred to as the spaghetti bowl: the tangle of pipelines snaking and bending through Kinder Morgan’s terminals at the Ship Channel. Here, the 300,000-barrel-per-day KMCC line ends, in the Texas cities of Galena Park and Pasadena.

Combined, the terminals have more than 26 million barrels of storage capacity. Whether the workers realize it or not, the KMCC pipeline is part of the metamorphosis under way in the oil and gas industry. Surging U.S. shale crude production has so overpowered existing infrastructure that it is now transforming it—from the products lines carry, to the direction they flow.

The need for infrastructure is born of two factors. Successful shale plays have been oil scavenger hunts, with finds in sometimes remote and unexpected areas. First to be discovered were natural gas shale plays; then technology was applied to develop liquids plays and revive conventional oil-producing areas. Often, infrastructure in these plays was simply nonexistent or inadequate.

Second, the nation’s existing midstream infrastructure doesn’t match today’s markets. For 40 years, U.S. energy policy assumed domestic production would grow scarcer and imports more critical, said Frank A. Verrastro, senior vice president and James R. Schlesinger Chair for Energy & Geopolitics at the Center for Strategic & International Studies, speaking at IHS CERAWeek 2013 in Houston. Instead, just the opposite has happened.

Ironically, as midstream infrastructure builds out in these production areas, moving crude by rail has become a popular option. Although it is more expensive, rail doesn’t require the longterm capacity commitment that producers must make for pipeline capacity, commitments that could backfire, notes Sandy Fielden, director of energy analytics at RBN Energy, Houston. And it offers flexible destination options.

For the past several years, as shale development moved into high gear, oil was shipped from the oil fields in the Permian Basin, Eagle Ford or Bakken shale plays via rail, barge or columns of trucks. But midstream companies like Kinder Morgan Inc., NuStar Energy LP, Magellan Midstream Partners LP and others are increasingly moving to reconfigure, reactivate or redirect existing pipelines to meet changing market dynamics. Often, they are clearing the way for crude oil moves by retooling pipes used in the past for petroleum products or natural gas that are below capacity—or simply redundant. That repurposing of existing systems comes along with reversals, switching the direction of pipelines’ flow.

In the Northeast, for instance, the huge Marcellus shale play is removing the need for natural gas shipments into the region from the Rockies, Canada and the Gulf Coast. As a result, many gas pipeline company revenue models “are being seriously impacted by reduced flows of natural gas,” says Fielden. Some of the plans are audacious: A proposal offered by Kinder Morgan is its Freedom pipeline project, a gas-to-oil conversion that would send oil from Midland, Texas, to California, at a cost of $2 billion. (At press time, KMI shelved this project, as it did not receive enough interest from oil producers.) In another instance, Calgary’s TransCanada Corp. is contemplating a project that could rewrite the way oil is imported into the U.S. Whether these proposals happen, or get moved aside by competing projects, remains to be seen.

Read the full article in the July 2013 issue of Oil and Gas Investor.