Merger Monday started with a bang. Sunoco Logistics, a crude and natural gas pipeline company, agreed to acquire Energy Transfer Partners, a large pipeline company, in a transaction worth $21 billion. On CNBC, Jim Cramer called it “the first Trump deal.”
The thinking: Energy companies are likely to be attractive investments and acquisitions under the incoming administration. Donald Trump is less concerned with the environment than his predecessor, and has promised more drilling for oil, fracking for natural gas, and mining for coal. Companies like Energy Transfer Partners—in which Trump owns shares—are therefore likely to encounter fewer obstacles to building pipelines, which will mean more liquids coursing through their metal veins. Indeed, Energy Transfer Partners is the parent company of the entity that is struggling to build the controversial Dakota Access Pipeline. (On Sunday, law enforcement deployed water cannons in frigid weather to try to disperse the Native Americans and environmentalists protesting the project.)
Simplistic explanations can be right. And it’s true that pipelines, especially those carrying oil, are a politicized topic. A case in point is the Keystone XL Pipeline, which was proposed to carry expensive, tough-to-get oil from the Alberta, Canada, tar sands, and which was ultimately stymied both by the Obama administration and shifts in the oil market. On the campaign trail Trump vowed to resuscitate it.
But there’s something else going on here. The Energy Transfer Partners deal happens to be motivated by two macroeconomic factors that Trump staunchly opposes: the war on coal and the open global trade of a vital national resource. The U.S. has an oil glut at the moment. Oil production rose about 88 percent between 2008 and 2015. But with prices having fallen sharply since 2014—largely due to a vastly increased supply—the boom is subsiding; in August, U.S. oil production was off 6.5 percent from the year before. It would be nice to have more oil pipelines, but the U.S. isn’t exactly starved for them.
Natural gas is another story. And natural gas pipelines are the asset that Energy Transfer Partners has—in spades—and that Sunoco Logistics lacks. Sunoco Logistics owns 5,900 miles of crude oil pipelines, a small amount of pipelines that carry liquids derived from natural gas, and storage facilities for products refined from both natural gas and oil. By contrast, Energy Transfer Partners owns and runs about “62,500 miles of natural gas and natural gas liquids pipelines,” the company claims, mostly in Texas, Oklahoma, Louisiana, and Pennsylvania.
Thanks to fracking, natural gas production has boomed in those states and others. Nationwide, natural gas production soared 40 percent between 2005 and 2015. At the same time, demand for natural gas all over the country (and around the world) has been booming. For a variety of reasons, ranging from cost to the desire to meet environmental mandates, power plants in every region have been switching from coal to natural gas. In 2008, coal and natural gas accounted for 48 percent and 21 percent of electricity generation, respectively; so far this year, coal accounts for only 27 percent of electricity generation while natural accounts for 34 percent. (And more broadly, fossil fuels are losing market share to renewables.) The election of Donald Trump won’t change that. In coming years, power plants will be using more natural gas rather than less. And that means it is really valuable to have pipelines that can move natural gas across great distances.
There’s a second factor weighing in favor of natural gas pipelines. During the Obama years, natural gas exports grew rapidly—rising more than threefold between August 2008 and August 2016. Most of those exports travel via pipeline across the southern border to Mexico. But this year, for the first time, natural gas—and liquids derived from natural gas—is being piped onto ships at terminals in Louisiana and Pennsylvania that are bound for Europe, South America, and Asia. There is surely much more of that to come. (Sunoco owns a storage facility at the Marcus Hook terminal in Pennsylvania, which is one of the places from which shipments of natural gas derivatives are shipped overseas.)
So, call it a Trump deal if you want. But the rise in demand for the cleanest-burning fossil fuel—and for the conduits that carry to them—is predicated largely on the displacement of coal and the formation of new global trade routes. And Trump has nothing to do with those facts.