You probably don’t recall what you had for breakfast, but it’s worth your while to remember what happened in 1906 because it helps to explain consolidation in this sector.

That was the year that Vilfredo Federico Damaso Pareto, father of microeconomics as well as an engineer, sociologist, political scientist and philosopher, developed his Pareto Principle. It’s based on his realization that 80% of the land in Italy was owned by 20% of the population.

That seeming inequality is, in fact, a model of business efficiency. More recently, the energy team at KPMG LLP examined the upstream sector and confirmed that about 80% of that segment’s market capitalization belonged to 20% of E&P companies. Midstream, populated by many smaller companies, is far less concentrated.

“That goes back to when the midstream business was viewed more as a harvest business,” Andy Steinhubl, KPMG principal in energy strategy, told Midstream Business. “The majors that had built the infrastructure, for the most part, and the large independents were exiting because the U.S. was viewed as a mature province. They were going to put their money back to work in E&P in other parts of the world. Shale changed all that, first gas and then oil.”

Adjusting to that change requires a lot more infrastructure, and that level of progress favors those with the most financial muscle, as opposed to the army of MLPs that have carried the sector so far. Recent deals reflecting this direction include Energy Transfer Partners LP’s wrapping up of Regency Energy Partners LP in an $18 billion move and Kinder Morgan Inc. taking Hiland Partners LP off of Harold Hamm’s hands for $3 billion.

Add low oil and gas prices to the mix, Steinhubl said, and more midstream players come into play, making Pareto’s 80/20 rule inevitable. “That’s going to accelerate the consolidation that was already set to happen,” he said.

So what did you eat this morning? Who cares? The important issue is what is devoured this afternoon. Buon appetito!

Joseph Markman can be reached at jmarkman@hartenergy.com or 713-260-5208.

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