Plentiful pipelines
‘There is a risk for an overbuild’ for Texas projects
PUBLIC outcries have stalled the Keystone XL, the Dakota Access Pipeline and other multistate projects, but here in Texas pipeline companies are relatively unimpeded and planning to stick more straws in the earth than may ever be needed.
There are at least 15 projects to expand or construct pipelines that will traverse most of Texas from the Permian Basin to Houston, Corpus Christi and Beaumont. These projects routinely cost more than $1 billion each and range from 300 miles to more than 700 miles long. They pose environmental risks, consume capital and will pump an increasing load of Texas’ energy reserves to other countries. On top of it all, analysts say they’re not going to be used to capacity.
“It’s a safe bet that industry will overbuild as we’ve seen in other basins,” said Ethan Bellamy, an energy analyst at Robert W. Baird & Co. “By 2020, it will be a buyer’s market for transportation capacity out of the Permian.”
Proposed crude oil pipelines would nearly double the current capacity levels from the Permian Basin, and plans for new natural gas liquids pipelines would raise capacity volumes by more than 50 percent, according to a new report from Credit Suisse analysts.
Pipeline operators are expanding after Congress lifted the nation’s decadesold crude exporting ban at the end of 2015. Since then, exports have risen to nearly 1 million barrels a day now, almost doubling 2016’s export averages. That number should rise to 3 million a day by 2025, driven by Permian production and pipeline growth, said Kurt Barrow, vice president over oil
markets for IHS Markit. The most bullish projections have the U.S. becoming a net crude exporter as soon as 2019.
The vast majority of new Permian oil production will simply be exported from Corpus and Houston to Asia and other growing regions, Barrow said. Gulf Coast refineries use some of the Texas oil, but they’re built to primarily rely on denser crude from Canada, Latin America and some Middle Eastern nations, and they’ll continue to import that oil.
Proposed pipeline capacity could easily eclipse production in a few years. Permian oil production is approaching 2.5 million barrels a day — up from less than 1 million as recently as 2011. But the amount of oil pipeline projects in the works could bring the Permian’s crude takeaway pipeline capacity to nearly 5 million barrels a day by 2020.
Even if U.S. oil prices rise to a consistent $60 per barrel, Permian production is projected to only barely exceed 4 million barrels daily. And $40 oil would cause production levels to fall below today’s levels, according to the Credit Suisse report. The U.S. benchmark for oil is currently hovering near $47 a barrel.
Despite the Permian boom, the number of active drilling rigs is showing signs of plateauing, and even some refining CEOs are complaining about pipeline companies trying to build too much. Too much too soon?
Perhaps not every proposed pipeline project will be built, and some companies may form joint ventures with others to avoid duplicative projects. But for now, they seem intent on ensuring their “mutually assured destruction,” said Jack Lipinski, CEO of Sugar Land-based CVR Refining.
“There are fewer and fewer pipelines that need to be built,” he said during CVR’s recent earnings call. “They are slowly realizing that the merry-goround is slowing down, and they’re hoping to be the winner.”
In the last wave of quarterly earnings calls, pipeline executives expressed long-term optimism about the Permian but, when pressed by wary analysts, expressed more openness toward joint venture efforts to reduce their liabilities and debt loads in a weak oil price environment.
DCP Midstream — a JV between Houston’s Phillips 66 and Calgary-based Enbridge — doesn’t want to risk building any new major pipelines on its own for now. Instead, DCP plans to expand its existing Sand Hills natural gas liquids pipeline capacity by 60 percent that runs from the Permian to Mont Belvieu. DCP also opted to partner with Houston’s Kinder Morgan for a new, 430-mile natural gas pipeline from the Permian to the Corpus Christi region that’s called the Gulf Coast Express pipeline project. Lessons to learn
DCP CEO Wouter van Kempen said there can be lessons learned from all the extra pipeline and processing capacity in South Texas’ Eagle Ford Shale, where the energy sector hasn’t bounced back as strongly from the recent oil bust.
“There is a risk for an overbuild, and we’ve seen it in many, many different places where a lot of people are skating to the buck and throwing a lot of capacity down,” van Kempen said.
Nevertheless, Kinder Morgan CEO Steve Kean loves the Gulf Coast Express project in part because it would tie into its pipeline network to Houston, giving the gas more options for different uses and destinations.
“The Houston Ship Channel is now a premium market in the gas market, and that’s driven by the fact that we have got LNG, power generation, petrochemical development and Mexico demand,” Kean said. Don’t have to be full
Oklahoma-based Magellan Midstream Partners owns the largest oil pipeline network from the Permian to Houston, and CEO Michael Mears said Magellan is one of eight players pushing crude pipeline projects from the Permian to Corpus, where there’s a refining base and a burgeoning world-class export hub. He acknowledged there’s a competitive landscape with lots of negotiating going on behind the scenes.
Mears and other pipeline players contend they don’t even need to keep their pipelines at full volumes to turn a profit. They just need the long-term contracts with exploration and production companies and enough minimum commitments to move forward.
“All the proposals are out there, and once somebody decides to make a commitment, then it’ll happen very quickly,” Mears said of the negotiations with oil and gas producers. “The pump is primed.”
The projects that can’t secure commitments are the ones that may fall by the wayside, he said.
Houston’s Plains All American Pipelines’ Cactus II project and Buckeye Partners’ South Texas Gateway pipeline are among the other Corpus crude efforts in the works. The first Cactus line is the only current major oil artery from the Permian to Corpus. Activists voice worries
Magellan is keeping busy expanding its BridgeTex oil pipeline capacity from Colorado City in the northern Permian to Houston by nearly 50 percent. Magellan owns BridgeTex jointly with Plains All American.
There are environmental and financial risks, though. Magellan’s other West Texas oil pipeline to Houston, the Longhorn pipeline, burst in July outside Austin, leaking nearly 90,000 gallons of oil in Bastrop County.
Luke Metzger, director of the advocacy group Environment Texas, said there are big environmental concerns that often go overlooked in Texas because of energy-friendly politicians and eased regulatory processes, especially for pipelines that don’t cross state boundaries, even if they’re 700 miles long.
“These spills, unfortunately, are pretty routine and hurt the environment and wildlife,” Metzger said.
One stark illustration of the weak sway environmentalist have had in Texas is Dallas pipeline magnate Kelcy Warren of Energy Transfer Partners. Despite protests, he was confirmed on the Texas Parks and Wildlife Commission this year, just as his business was building a pipeline that runs adjacent to Big Bend Ranch State Park.
Energy Transfer currently is proposing building the Permian Express 3 pipeline from the Midland Basin to Beaumont ports. Likewise, Houston’s Enterprise Products
“There are fewer and fewer pipelines that need to be built. They are slowly realizing that the merry-go-round is slowing down, and they’re hoping to be the winner.” Jack Lipinski, CVR Refining
Partners already is constructing its Midland-toSealy crude pipeline in the Houston area. Shipping constraints
Some say that the Houston Ship Channel is getting too crowded and that Corpus Christi has become a more ideal place to expand.
Enterprise CEO Jim Teague scoffs at this claim.
“There’s a famous guy in Washington, D.C. that would call that fake news,” he said. “You look at what producers want. They want to make sure that their product flows, and they want market choices. When you’re in Houston, you’re not captive to a limited market. You’ve got multiple outlets.”
Enterprise’s Shin Oak NGL pipeline proposal and Houston-based Targa Resources’ pending Grand Prix pipeline are among those fighting to bring more natural gas liquids to the Houston area for petrochemical plants and products exports.
Still, many industry observers remain fascinated by the notion that Corpus Christi can rapidly grow into a major export hub. There’s less traffic and deeper waters that can accommodate larger crude oil tankers vessels. Houston’s Occidental Petroleum Corp., for instance, is beginning work to modify its Corpus Christiarea terminal to accommodate the largest crude tankers.
Other pipeline projects aiming for Corpus Christi are led by newer companies with private equity funding both domestic and international. Houston startup Permico Energia, with South Korean investments, has proposed a $2 billion effort with a 510-mile NGL pipeline to refining and port access near Corpus Christi. Likewise, a three-company consortium — San Antonio’s TexStar Midstream Logistics, Castleton Commodities International and Dallas-based Ironwood Midstream Energy — is pushing a massive, 730-mile crude pipeline to Corpus Christi. Oil is still below $50
In the Permian, lower oil prices currently are causing a lot of producers to sit on their wells after drilling them, waiting an average of five months or more to start pumping oil out of them, according to Plains All American. Surge next year?
That backlog could create a production surge next year when the wells are finally completed. In the shorter term, that could mean production growth outpaces pipeline construction, Sandy Fielden, Morningstar’s director of oil and products research, said in a recent report.
Longer term, cheaper crude coupled with a global glut could create big problems for Texas pipeline companies betting billions of dollars on growth. Big investment decisions are made well in advance of the stop-andstart oil production ups and downs in Texas shale plays.
“An oversupplied market could prompt lower prices that might in turn choke off new shale production before planned new pipelines come online,” Fielden wrote. “That is the quandary for today’s midstream developers in a post-shale world with shorter boom-and-bust cycles.”