Morningstar: Cautiously optimistic outlook for midstream sector in 2025
The outlook for the pipeline and midstream sector in 2025 is neutral to modestly positive, according to investment research company Morningstar.
Midstream asset utilization levels in North America were robust in 2024 as oil and gas production reached record highs, primarily driven by an increase in energy exports. While the outlook for crude oil prices in 2025 remains volatile, the fundamentals for natural gas prices are constructive, said Morningstar.
Consequently, oil and gas production in North America is expected to increase modestly in 2025 and overall asset utilization in the midstream sector is expected to remain strong.
In addition, the sector is characterized by contracted cash flows, which tend to be relatively stable and typically protected from short-term volatility in energy prices.
According to Morningstar, the focus in building out midstream infrastructure to meet demand growth in natural gas is expected to continue in 2025. The North American sector is bullish on natural gas demand growth driven by LNG exports and power demand growth fueled by artificial intelligence (AI) applications and the related need for data centers. In Growth in AI-fueled data centers is expected to add an additional 3-5 bcfd of demand (an incremental 3-4% of total demand) in North America over the next few years.
According to US Energy Information Administration estimates, about 20 bcfd of pipeline capacity is under construction in the US to serve LNG export plants.
Recent developments in Europe, including Ukraine's decision to end a Russian gas transit deal on Dec. 31, 2024, will increase Europe's reliance on seaborne LNG import.
“The sector will continue to invest in maintaining and optimizing existing crude oil pipelines; however, we do not foresee major investments in developing new crude oil pipelines. We do expect the sector to continue to invest in developing NGL infrastructure in North America, including NGL pipelines and fractionation facilities. While capex in the sector may increase to capture the projected growth in demand for natural gas, we expect the sector to be fairly disciplined in its approach to capital investment and focus on projects that generate contracted cash flows. In Europe, we expect continued investment in LNG regasification infrastructure in 2025, albeit at lower levels compared with the last two years,” the investment research firm said.
More welcoming political landscape
Meantime, the shift in the political landscape in North America could potentially accelerate this capital deployment as both the incoming Trump administration in the US and the Conservative Party of Canada, which is leading in the polls in Canada, have expressed support for reducing the regulatory burden.
“Potential decisions by the incoming Trump administration include ending the moratorium on new LNG export project permits and the relaxation of permitting restrictions on oil and gas exploration and development on lands owned or controlled by the US federal government. In Canada, the Conservative Party, if elected, could reverse the existing carbon tax regulations and scrap the proposed cap on greenhouse gas emissions. While O&G producers are unlikely to immediately deviate from their current strategy of focusing on disciplined growth and returning cash to shareholders, a positive political landscape could be a tailwind for growth in the sector over the next 5 years,” said Morningstar.
A possible cause for concern is President-elect Donald Trump's stated intent to impose a 25% tariff on all imports from Mexico and Canada.
However, Morningstar is "there is a degree of skepticism about whether the incoming US administration will follow through on its threat on the O&G sector as tariffs are likely to drive up the cost of gasoline and other refined petroleum products for US consumers. Given the sensitivity of public sentiment to higher prices at the pump and the potential for inflation to reignite, we believe the new administration will face considerable backlash from US consumers regarding tariffs placed on O&G imports from Canada."
Low-carbon activity investment
Despite environmental, social, and governance (ESG) considerations coming under scrutiny, Morningstar believes that the midstream sector will increase investment in energy transition opportunities. Overall, outlook in the sector is expected to remain stable in 2025.
“In North America, we expect the sector to place an emphasis on carbon capture, utilization, and storage (CCUS) projects. The technical expertise gained by companies in the sector through their existing pipeline businesses can be translated to the CCUS domain and the sector is accustomed to executing large, complex projects," the firm said.
“We also expect certain issuers to continue to invest in renewable power generation projects. In Europe, the focus of the sector is likely to be on hydrogen with the proposed development of the European Hydrogen Backbone. This initiative is likely to provide the sector in Europe with an opportunity to convert its existing natural gas pipeline infrastructure (with modifications) to transport hydrogen and build new pipeline infrastructure.”
