The midstream sector is gearing up for a pivotal moment as we look toward 2025. Investment research company Morningstar paints a picture that is neutral to modestly positive, reflecting a landscape shaped by robust asset utilization and shifting political dynamics. North America’s oil and gas production hit record highs in 2024, largely fueled by surging energy exports. This uptick is expected to carry over into 2025, with Morningstar forecasting a modest increase in production levels.
What’s particularly interesting is the contrasting outlook for crude oil prices, which remain on shaky ground, while natural gas fundamentals appear more stable. This divergence suggests that while crude might be a rollercoaster ride, the natural gas market is poised for steady growth. The ongoing demand for liquefied natural gas (LNG), driven by both international exports and burgeoning power needs—especially from AI-powered data centers—could add an incremental 3-5 billion cubic feet per day (bcfd) of demand. That’s a significant chunk, amounting to 3-4% of total demand in North America.
As the U.S. ramps up its pipeline capacity—around 20 bcfd is currently under construction to feed LNG export plants—Europe is also adjusting its strategy. With Ukraine’s decision to end its Russian gas transit deal by the end of 2024, Europe’s reliance on LNG imports is set to rise. This geopolitical shift could create more opportunities for North American exports, further solidifying the region’s role in the global energy market.
However, it’s not all smooth sailing. Morningstar notes that while the sector will maintain and optimize existing crude oil pipelines, the likelihood of significant new investments in crude infrastructure seems slim. Instead, the focus will be on developing natural gas liquids (NGL) infrastructure, including pipelines and fractionation facilities. The discipline in capital investment is a nod to the sector’s cautious approach, prioritizing projects with contracted cash flows.
The political landscape in North America could also play a crucial role in shaping future developments. The incoming Trump administration and a potentially Conservative-led Canada have both signaled intentions to ease regulatory burdens. This could pave the way for new LNG export project permits and a relaxation of restrictions on oil and gas exploration on federal lands. However, the specter of tariffs looms large, with Trump’s proposal of a 25% tariff on imports from Canada and Mexico stirring concern. The backlash from consumers facing higher gasoline prices might temper any aggressive moves in this direction, creating a complex interplay between policy and market realities.
On the environmental front, the midstream sector is not ignoring the growing emphasis on low-carbon initiatives. Morningstar anticipates increased investments in carbon capture, utilization, and storage (CCUS) projects, leveraging the technical expertise gained from existing pipeline operations. In Europe, hydrogen development is on the horizon, with plans to repurpose natural gas pipelines for hydrogen transport.
As we head into 2025, the midstream sector stands at a crossroads. The interplay of market conditions, political shifts, and environmental considerations will undoubtedly shape its trajectory. The balance of maintaining robust asset utilization while navigating the complexities of energy transition will be a defining challenge. Investors and stakeholders alike will be watching closely, as the decisions made today will echo through the industry for years to come.
