Gas flaring. Torch against the sky.
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Within global infrastructure, North American natural gas offers investors ample opportunity for growth.

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Lachlan Pike, portfolio manager at Maple-Brown Abbott in Sydney, Australia, said in mid-June that his positive outlook on the space was primarily coming from “attractive earnings growth [that] we see accruing from significant capital expenditures.” This kind of spending is required to “build and improve existing gas networks to accommodate expected natural gas demand within North America,” he added during that interview.

The need for pipeline expansion, in particular, is a situation Canadians are familiar with: the domestic federal government recently announced a plan to purchase Kinder Morgan’s Trans Mountain pipeline and related infrastructure as a way to move forward with oil sands pipeline expansion. (The government says it will eventually sell the acquisition.)

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Pike, whose firm manages the Renaissance Global Infrastructure Fund, says he holds Kinder Morgan based in part on its strategic position within the natural gas pipeline market. The company “controls the largest natural gas transportation network in North America, owning or operating approximately 70,000 miles of natural gas pipeline and transporting approximately 40% of the natural gas used in the U.S. on a daily basis,” he says.

And the company is primed for further expansion.

“Kinder Morgan currently has more than US$4 billion in near-term capital expansion programs that it is pursuing to allow for the expansion of its integrated natural gas pipeline network,” Pike explains.

These projects are underpinned by long-term contracts with customers or cost-of-service regulation, which means the company will have “very limited exposure to underlying commodity prices,” says Pike (he notes his firm doesn’t invest in businesses with such material exposure).

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Some of the expansion programs focus on modernizing existing infrastructure, but most aim to open up natural gas pipeline access. And, “given our positive view on the potential for further new project announcements, we expect this backlog to grow over time,” he adds.

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Gas on demand

Growing demand for natural gas is a trend to watch, Pike says.

“Looking just at the United States, total natural gas demand is expected to increase by approximately 33% over the next 10 years,” he says, adding demand growth is also expected in Canada and Mexico.

The surges are driven by such factors as coal-to-gas switching, and construction of new liquefied natural gas (LNG) export facilities.

“Over the past 10 years, gas-fired generation has increased rapidly in the United States,” says Pike. “Natural gas now provides more electricity generation than coal on an annual basis.” Part of the reason is environmental regulation and the increase in renewable energy generation: “In total, approximately 45% more electricity was generated by natural gas in 2017 than in 2008,” he says.

Consumers switching to natural gas benefits gas pipeline owners and increases the need to build new pipelines. Plus, it has environmental benefits: “When combusted, natural gas emits 44% less [carbon dioxide] than coal and has lower levels of nitrogen oxides, sulfur dioxide and particulate matter,” says Pike.

So the U.S. is seeing “significant build” of new LNG facilities, and Canada may also see such growth, he says. Already, seven LNG export facilities are either under construction or completed in the U.S., with four more approved, Pike notes.

“Together, these facilities have approval to export approximately 20% of additional U.S. national natural gas demand once fully completed, creating significant extra transportation demand on existing pipelines and creating further opportunities for new pipeline build,” he says.

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Supply-side surprises?

As of mid-June, Pike held about 20% of his investments within North American natural gas infrastructure, and that included pipeline and other midstream assets, and gas utilities.

Over the medium term, he said the main risk to his holdings were supply-related issues, despite new drilling methods driving gas production and reserves in Canada and the U.S. over the past decade.

Says Pike: “Social licence to continue drilling for gas will depend on the ability of the energy industry to continue to act appropriately with regards to energy production and related externalities.”

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