In his September 2011 speech on job creation and in his State of the Union address this January, President Obama highlighted the importance of infrastructure to the U.S. economy, national security and competiveness as a nation. Indeed, repairing old and worn-out infrastructures does maintain their viability and creates jobs; but, for America to truly benefit and leap ahead, we need much more than repair. In particular, the U.S. must redefine the form, fit and function of its infrastructure and rethink our approach to infrastructure financing, partnerships, business models and human-capital options. This requires "re-imagining infrastructure," just as we imagined those infrastructures when we first conceived them.

As population growth, technological advances and new energy sources race ahead, we also need to re-imagine our oil and natural gas storage and distribution infrastructure. Relevant business models and new financing sources are needed to enable the whole system to work with the proper balance of centralized and decentralized functions, regulations and incentives, stakeholder engagement and government oversight.

The shales' effect

The discovery of new sources of natural gas from shale deposits has created a dramatic shift in energy economics, but the extant infrastructure has neither the reach nor the capacity to deliver this newfound treasure to consumers. Moreover, the current infrastructure only becomes more stressed as natural gas becomes the near-term fuel of choice for power generation across the continent due to its cost and reduced emissions. Consequently, the North American oil and gas midstream infrastructure capacity must be sized and expanded to accommodate the increased demand with the new production capacity.

Many regions in North America require significant midstream investment to link new oil and gas supplies to the market. For example, investment is needed to solve the natural gas liquids (NGLs) bottleneck at Conway, Kansas, as well as the crude oil bottleneck at the Cushing Hub in Oklahoma, which has resulted in wide regional price spreads for West Texas Intermediate (WTI) crude oil. Also, there is a growing need for NGL take-away and fractionation capacity from emerging liquids-rich plays such as the Marcellus shale, for example, where producers are creating ethane take-away solutions to reach petrochemical end-markets.

The Interstate Natural Gas Association of America (INGAA) estimated in June 2011 that to transport U.S. and Canadian production over the next 25 years, the U.S. needs an additional 43 billion cubic feet per day (or 35,000 miles) of natural gas transmission mainline pipeline capacity; about 1.3 billion cubic feet per day (or 412,500 miles) of gas gathering and processing pipeline capacity; and some 7 million barrels per day (or 32,500 miles) of NGLs and oil transmission pipeline capacity. The greatest need for gas-pipeline expansion is in the Southwest, followed by the Central, Southeast, and Northeast regions of the U.S., according to the report.

Liquids-rich plays include the Eagle Ford in South Texas; parts of the Marcellus; the Utica shale formation in West Virginia, Ohio and Pennsylvania; the Bakken of North Dakota; and the Niobrara and Green River shale formations in Wyoming and Colorado. Some of the largest areas of oil-production growth are expected in Western Canada (mainly from bitumen and synthetic crude from oil sands) and the U.S. Rocky Mountains.

The INGAA report also estimates that the U.S. and Canada will need to invest more than $10 billion per year (81% for natural gas, 13% for oil and 6% for NGLs) through 2035 to develop new transmission, gathering and lateral pipelines and associated processing and storage facilities to facilitate this production growth. Master limited partnerships may provide much of this investment, but we will need even more if we truly re-imagine the overall infrastructure system.

The staggering challenges of major shifts in supply and demand, skilled workforce shortfalls, aging distribution pipelines, and difficult environmental and regulatory requirements make this a truly complex equation. This complexity has rendered the track record for funding, repairing and increasing oil and gas pipeline capacity vexing at best. We clearly need to invest more, and smarter.

The U.S. spends less than 2% of its gross domestic product on all infrastructure, while China and India, admittedly starting from a much lower base of fixed assets, are spending 9% and 5%, respectively. It's time to re-invest in America, and that investment should not be to solely maintain the status quo; it should be designed to deliver major leaps in capacity, performance, efficiency and sustainability. This is particularly true of our oil and gas midstream infrastructure.

Curiously, our lack of investment has not been brought about simply by a lack of capital as most would think. We have money to fund major projects, especially when taking into account private capital sources that have not yet been effectively unleashed. So, how can we better harness private capital and re-imagine our oil and gas midstream infrastructure to yield orders of magnitude in improved performance and return?

A four-step solution

We need to take four steps to address this challenge.

First, infrastructures are complex networks of people, processes and technology that range across multiple jurisdictions to deliver a needed end-service. It helps to view this network as a complex system having multiple, interdependent layers, ranging from its physical components, at the foundation, to its overall purpose, at the top. Surrounding the layers are communities of stakeholders, each with their own interests and motives.

Re-imagination requires optimizing and integrating all these layers as a unified whole and effectively engaging the stakeholder communities, by convincing them to take the long view and move beyond their near-term self-interest. When we speak of the U.S. oil and gas infrastructure today, we often only address one or two layers at a time (e.g., the physical assets, like pipelines).

Second, the U.S. needs a set of design principles that accommodate future technological change and the new needs of our citizens. These qualities don't emerge by accident; they must be designed in. One important way to accelerate infrastructure adaptability is to use modularity within an open architecture design. Modularity allows the larger infrastructure system to adapt to changing conditions without disrupting its function as a whole.

Another design consideration is sustainability. Sustainable infrastructure benefits the environment, the economy and our social well being, now and for future generations. To succeed, these design principles need to be developed with input from and consideration of all relevant stakeholders.

Third, stakeholder communities are wired to pursue their own self-interests. It is leadership's job to broker common ground so that stakeholders can align their interests around a mutual objective.

There is a new engagement approach that provides this outcome. Known as a "megacommunity," it recognizes that complex problems and transformational projects cannot be solved by a single organization or a circumscribed group of stakeholders. All sectors must participate: business, government and civil society working together to achieve the ends our nation needs—better security, better businesses, and better quality of life for our people. Megacommunities harness the power of networked resources, idle capacity, and organizational adaptation. They have worked in response to natural disasters and can work here too.

The idea of a megacommunity is critical to re-imagine infrastructure as it forms an expansive, self-sustaining network that puts people with the right resources in the right place at the right time. A megacommunity is not just another term for a public-private partnership. A public-private partnership focuses on a relatively narrow purpose and is formed, governed and constrained by a static legal agreement. A megacommunity is a sphere in which stakeholders join together around a compelling issue of national importance and follow a set of practices and protocols that make it easier for them to work out differences and achieve results.

Fourth, renewing infrastructure requires a national vision that defines the nation's long-term needs and a policy framework to integrate the separate but interdependent policies (e.g., energy, environment, transportation, etc.). Coherent policies also yield more stable, lower-cost financing approaches, since investors are better able to plan and to forecast returns. The magnitude of this challenge requires bold leadership at multiple levels and a mobilization of our political will at a national level. A national vision would provide an explicit road map that sets priorities, because the various U.S. infrastructures are governed independently, but many are mutually dependent on each other.

To that end, a Presidential Commission should be launched to formulate major recommendations for action. This commission—comprised of members of the executive branch, Congress, state and local governments, the private sector, universities, nonprofit organizations and associations—should convene several national forums to elicit broad stakeholder involvement and build momentum towards delivering dramatic results.

The monumental achievements of the U.S. in the past were made possible by a clear vision and focused effort on a national scale. Such a vision would be a critical first step in creating the stable foundation for a modern America.

Incentives matter

Vision is vital but not sufficient to get us there. An accompanying regimen of laws, regulations and incentives at the federal level may be necessary to induce both the thinking and behaviors we need. Given that the U.S. Congress itself is segmented by its committee structure, a special congressional infrastructure committee might ensure more integrated and cohesive policy formulation as well as long-term, stable budgeting commitments.

National infrastructure legislation will need to set new integrated policy mandates, widen the range of financing approaches, define new agency responsibilities, provide oversight and target specific appropriations. Coordinated legislative enactments need to create a menu of approaches for infrastructure development by federal agencies, states, localities, utilities and the private sector. One size will not fit all, and it is imperative that policies, programs and funding mechanisms remove barriers and create meaningful incentives for bold action by all of these stakeholders.

Above all, a new unified approach must provide a framework in which the private sector is incentivized to invest in our nation's infrastructure. Federal, state and local government funds are simply not there. The action plan requires regulatory reform to deliver more impact from existing government funds and grant formulas, while enabling and leveraging the use of significant private capital through the development of robust new financing strategies and contractual arrangements.

Specific areas of focus for regulation should consider integrated funding that spans agencies and private-sector investment that reflects performance-based projects. Leveling the playing field could be achieved by streamlining infrastructure project approvals and reducing "political risk" faced by project sponsors to open up deal flow on an unsolicited basis and to shape the tender process. Providing tax exemptions for private infrastructure investments, removing the cost-of-capital advantage for tax-free municipal financing, would also help unleash private capital.

Some strategies, as proposed by the National Petroleum Council, offer step-change potential. These include establishing councils of excellence (engaging stakeholders) addressing environmental, safety and health practices, and corporate commitment to prudent development that includes environmental performance, such as reducing methane emissions.

The nation's economic health, national security, national competiveness, and quality of life all depend on the ability to modernize and expand our infrastructures. This is especially true for America's oil and gas storage distribution infrastructure, given projected demand and the vast new domestic sources of supply found in recent years.

Mark Gerencser is an executive vice president at Booz Allen Hamilton and managing partner of its global commercial business. Tina Vital is an associate at Booz Allen Hamilton, where she advises clients in the public and private sectors on energy economic and financial issues.