Published on Tuesday, March 10 2020
Authors : Robert Auers

The past several years had already been a difficult period for the midstream world (in terms of equity performance), but the past few weeks have been particularly harsh. Yesterday’s oil price crash as a result of the Russian/Saudi tit for tat (piling on to the growing COVID-19 fears) has put a major exclamation point on this recent downturn.  For now, everything surrounding the oil markets (and the broader stock market and global economy for that matter) feels like we’re, as Ozzy Osbourne put it, “going off the rails on the crazy train.”  Nonetheless, midstream firms continue to invest, though capital spending is expected to be significantly lower this year than last, and lower yet again in 2021.  Still, the current level of planned spending was determined before the current price war broke out.   If this current situation holds (i.e., this price war continues with no OPEC+ agreement in the next 1-2 years) midstream capex will likely be further curtailed as production growth slows, and likely reverses, due to a lack of upstream capex. For now, however, we’ll review some of the major projects under development as of the 4Q 2019 earnings season.  For the purpose of this blog, we’ll focus on the liquids side (crude oil and products) as we believe these projects are most relevant to the majority of the readers of this blog.

Enbridge

Enbridge placed the Canadian segment of the Line 3 Replacement in service in 4Q 2019 and the pipelines “Certificate of Need” was reinstated by the Minnesota Public Utilities Commission on February 3, 2020, paving the way for final permitting to continue for the U.S. section of the line.  Enbridge declined to give a detailed estimated timeline for the permitting process in Minnesota, but we note that completion of the Line 3 Replacement is a prerequisite for Mainline Contracting (MC), which Enbridge is targeting to go into effect in July 2021.  Therefore, Enbridge presumably still believes completion of the pipeline will occur before this date (though we note that MC itself is facing significant opposition and is going through a challenging approval process).  Enbridge, also continues to pursue a 50 MBPD expansion of the Express pipeline from Western Canada and further expansions of Flanagan South, Seaway, Southern Access (Superior to Flanagan), and the Southern Access Extension (Flanagan to Patoka) to ultimately enable additional volumes to reach the U.S. Gulf Coast.  The Gray Oak Pipeline, a JV with Phillips 66 and Marathon Petroleum running from the Permian Basin to Corpus Christi, was recently placed in service as well, further boosting the amount of surplus Permian crude takeaway capacity.  Lastly, Enbridge recently reached an agreement with Enterprise to form a 50/50 JV to build the SPOT offshore crude export terminal capable of loading VLCCs near Freeport, TX.  Thus far, this is the only proposed VLCC terminal that has received an FID.

Plains All American

Plains continues to pursue three major growth projects that could potentially have important effects on North American crude flows and differentials.  First, the Capline reversal / Diamond Expansion, which will enable crude to flow from Cushing, OK, and Patoka, IL, to St. James, LA, is slated to begin light crude service in mid-2021, with heavy crude service following in early 2022.  This will provide the most direct route to transport crude oil from the midcontinent to the Eastern Louisiana Gulf Coast.  Second, the Wink-to-Webster pipeline (a JV with Exxon Mobil, Delek, Marathon Petroleum and Lotus Midstream) will transport crude oil from the Permian Basin to the Houston and Beaumont / Port Arthur markets beginning in the first half of 2021 (some partial service may begin in late 2020).  Enterprise is also participating in this project via an undivided joint interest and is calling their portion of the pipeline Midland-to-Echo 3. Added together, the total capacity of the physical pipe will be ~1.5 MMBPD with ~450 MBPD attributable to Enterprise and 1,050 MBPD attributable to the JV partners.  Finally, the Red Oak pipeline (JV with Phillips 66) will initially provide ~450 MBPD of capacity from Cushing to the Houston, Beaumont / Port Arthur, and Corpus Christi markets in the first half of 2021. This will be the only pipeline to provide the ability to transport Canadian heavy crude by pipeline directly to Corpus Christi.

Enterprise

Most of Enterprise’s growth projects are focused on NGLs and petrochemicals, with most of the projects centered in or providing transportation to Mont Belvieu.  The primary exceptions are the aforementioned Midland-to-Echo 3 and SPOT projects along with Midland-to-Echo 4, which will add an additional 450 MBPD of crude oil capacity from the Permian Basin to the Houston area the first half of 2021.

Energy Transfer

Energy Transfer is continuing its integration with SemGroup, whom it acquired in December 2019.  This, notably, makes Energy Transfer the new owner of HFOTCO, a major crude and fuel oil storage terminal on the Houston Ship channel.  Energy Transfer has proposed to the new Ted Collins pipeline (due in 2H 2021) to connect this facility with its existing Nederland terminal.   Energy Transfer also plans further expansion of DAPL to as much as 1.1 MMBPD in early 2021; however, a smaller expansion to 700-800 MBPD is more likely (in our view) for now (current capacity of the system is 570 MBPD).  Further, Energy Transfer completed several major projects in the 2H of 2019, including the J.C. Nolan diesel pipeline, supply diesel to the Permian Basin from the Gulf Coast, and completion of its Permian Express 4 pipeline, adding an additional 120 MBPD of Permian to Gulf Capacity.   Lastly, Energy Transfer continues to seek commitments for its proposed offshore VLCC-capable terminal near Nederland, TX.  Recent events have obviously decreased the odds of this project reaching an FID in the near term.  The majority of Energy Transfer’s other projects center around NGLs and natural gas.

Magellan

Magellan continues to focus primarily on refined projects with a smaller focus on crude oil, with most of its crude oil assets centered around its East Houston and Cushing terminals.  In 2H 2019, Magellan completed its Houston-to-Hearne products pipeline, helping the company to debottleneck its Texas refined products system.  Further, this project will be followed in mid-2020 by an expansion of Magellan’s West Texas refined products system, providing additional diesel capacity to the Permian Basin.  Saddlehorn (providing crude service from the DJ Basin to Cushing) is expected to complete a 100 MBPD expansion in 2H 2020.  Lastly, Magellan continues to expand crude and products export capacity from its East Houston Terminal and stated that they are considering partnering with Sentinel Midstream on the Texas GulfLink VLCC terminal, though recent events obviously decrease the likelihood that this project will ultimately reach FID.

Kinder Morgan

Since the sale of Transmountain, the large majority of Kinder Morgan’s projects have centered on Natural Gas, particularly the Elba Island LNG export terminal and Permian natural gas takeaway projects.

TC Energy

TC Energy’s only major liquids project under consideration is Keystone XL, whose fate remains in limbo and will likely depend on the results of the U.S. presidential election in November.  No material updates were provided with regards to the project in the call.

Turner, Mason & Company is continually monitoring developments in the global petroleum markets and assessing how they will impact the industry.  Considering the dynamic events impacting the petroleum industry (the Russia/Saudi spat, other OPEC policy developments, IMO, COVID-19, trade wars, low carbon standards, EV incentives, various sanctions, etc.), the future landscape of the petroleum industry is as uncertain as ever. TM&C not only executes regular and comprehensive studies of the industry, such as the Crude and Refined Products Outlook and Worldwide Refinery Construction Outlook, but also one-off studies focusing on specific issues, such as the recent report we completed on options available to overcome bottlenecks impacting the production and transportation of Western Canadian crude – Clearing the Bitumen Bottleneck.  We also use the findings of these studies and our expertise to assist clients in all segments of the petroleum supply chain in specific and focused consulting engagements.   For more information on our subscription studies or our consulting capabilities, please call us at 214-754-0898 or visit our website at turnermason.com.