Published on Tuesday, June 4 2019
Authors : Robert Auers

North American midstream investments are trying to keep pace with rapidly growing production with most midstream operators benefitting financially from this production growth (though you might not know it looking at their equity performance). In the last installment of our Q1 earnings call reviews; we focus on the larger Midstream companies to assess how announced growth projects are likely to impact the North American energy landscape going forward.

Plains All American

Plains continues to be a dominant player transporting crude oil through and out of the Permian Basin. The company announced they completed a further 900 MBPD of Permian gathering and intra-basin capacity during the first quarter. Moreover, they are still on track to complete Cactus II in 3Q 2019 with an initial capacity of 670 MBPD (expandable to 890 MBPD with additional pumping stations) to Ingleside, and full service to Corpus available in 1Q 2020. The Capline reversal (providing southbound service to St. James) is expected to go into service in 3Q 2020 and will be accompanied by a 200 MBPD expansion and slight extension of the Diamond pipeline, enabling service from Cushing to St James.  In addition,  Plains (with new JV partner Delek) is planning an 85 MBPD expansion of its Red River crude system (running from Cushing, OK, to Longview, TX) where it will provide feedstock to Delek’s Tyler refinery or continue to the Eastern Gulf on Energy Transfer’s Longview & Louisiana extension of its Permian Express system. Lastly, Plains still anticipates a 1H 2021 completion for its 1.5 MMBPD Wink-to-Webster JV pipeline, which is expected to transport crude oil from the Permian to Houston and Beaumont. Marathon, along with existing partners ExxonMobil and Lotus Midstream, became the fourth JV partner on this project after the cancellation of the Permian Gulf Coast (PGC) pipeline.

Magellan Midstream

Magellan continues construction on its Pasadena marine terminal (JV with Valero) with completion expected before the end of 2019. This project will include an Aframax capable dock and will primarily be used for product exports (mostly sourced from Valero’s regional refineries). Magellan is also expanding its Seabrook terminal (JV with LBC Tank Terminals) to increase capacity for crude exports and add Suezmax capability. In addition, the company is constructing a new 85 MBPD (with expansion capability) refined products pipeline from Houston to Hearne, TX. This will be accompanied by a 75 MBPD expansion of Magellan’s Hearne to Alexander pipeline, freeing up capacity on other lines into the Dallas/Ft Worth region and Oklahoma. Finally, Magellan continues to pursue its proposed Voyager pipeline project from Cushing to Houston and is exploring an expansion of its Saddlehorn pipeline (JV with Plains and Anadarko) from the DJ Basin to Cushing. 

Enterprise

Enterprise recently completed its 550 MBPD Shin Oak NGL pipeline, running from the Permian to Mont Belvieu, and correspondingly converted an existing 200 MBPD NGL pipeline running from the Permian to Houston, to crude oil service. Further, Enterprise continues to add NGL capacity on its Front Range and Texas Express NGL pipelines (JVs with DCP Midstream) running from the DJ Basin and Permian, respectively, to the Gulf Coast. Enterprise also continues to add Permian gas processing capacity, Mont Belvieu fractionation capacity, increased ethylene pipeline capacity along the Gulf Coast, and a 30 MBPD butane dehydrogenation plant at Mont Belvieu. Lastly, Enterprise stated that they maintain their plans for the construction of a 2 MMBPD offshore VLCC export facility located near Freeport, TX. This project (if completed) would be in direct competition with Enbridge’s proposed offshore Texas COLT project, also located offshore near Freeport, TX.

Energy Transfer

Energy Transfer completed its Bayou Bridge project (JV with Phillips 66) with service from Houston to St James in March 2019 and announced the expansion of the DAPL system to 570 MBPD. The company is also pursuing opportunities for further expansion of this system. We suspect that the eventual maximum capacity of this system, given pipe diameter, is around 800 MBPD to Patoka. ETCOP (from Patoka to Houston) has some smaller diameter sections, and may not be capable of handling the same volumes. Energy Transfer says they may eventually loop this section, but we view this as unlikely due to the large amount of southbound capacity out of Patoka expected to be added by Capline next year. As with many others, Energy Transfer continues to deploy capital around the Permian, with the construction of new gas processing capacity, an expected further 120 MBPD of its Permian Express system in 3Q 2019, a new 30 MBPD diesel pipeline from Hebert (Nederland) to Midland, and an extension/expansion of its Lone Star Express NGL pipeline from Ft. Worth to Wink, TX, providing service from the Permian to Mont Belvieu, where Energy Transfer continues to add NGL fractionation capacity. Finally, as with Enterprise and Enbridge, Energy Transfer is pursuing an offshore VLCC-capable export terminal on the Texas Gulf Coast – though their proposal is for Nederland, TX, instead of Freeport.

Enbridge

Enbridge’s most important projects revolve around its Mainline. The first of these, which Enbridge spent a substantial portion of its earnings call addressing, is the Line 3 replacement. This project will restore the pipeline to its original capacity – adding 370 MBPD of capacity from current levels – by late 2020. (This project faced yet another setback yesterday with the Minnesota Court of Appeals ruling that the EIS was incomplete because it did not fully account for a potential spill into the Lake Superior watershed.  We estimate (with high uncertainty) that this will lead to another 3-6 month delay on top of the current late 2020 timeline.) Enbridge believes they can add a further 450 MBPD of mainline capacity by 2023 through other initiatives. They see further opportunities to transport this crude all the way to the Gulf Coast through Flanagan South, Seaway, and possibly, a reversed Capline. Lastly, the Gray Oak crude pipeline (JV with Marathon and Phillips 66) remains on track to be placed in service before the end of 2019. Enbridge plans to follow this project with the previously-mentioned Texas COLT Crude Export project in late 2021 or early 2022.

Kinder Morgan

Kinder Morgan’s most important growth projects remain its two ~2 BCF Permian gas pipelines – Gulf Coast Express (GCX) and Permian Highway (PHP). The first is set for completion in the third quarter of 2019, with completion most likely in July or August, while the second is set for completion in 3Q 2020. These projects will help considerably in relieving the Permian gas pipeline bottleneck and may help lift crude production in the basin as well, as operators will now have a new outlet for associated gas.

Our Takeaways

Continued production growth in the Lower 48 and Western Canada has led to a corresponding demand for midstream assets to move this production to market. Political opposition to new pipeline construction (and even to existing pipelines in the case of Enbridge Line 5) in areas outside of Texas, Oklahoma and Louisiana remains a threat to the completion of much needed transportation infrastructure longer term.  Still, all major crude oil-producing basins aside from the WCSB and the Permian appear to have sufficient capacity for the time being.  Moreover, the Permian looks to have plenty of pipeline capacity for the foreseeable future with the completion of the projects mentioned above and the EPIC pipeline to Corpus Christi (3Q 2019). While we do expect a short-term capacity overbuild out of the region, strong production growth and the cancellation of the Permian Gulf Coast pipeline will prevent the overbuild from being too long-lived. The build-out of export capacity along the Gulf Coast remains a hot topic as well, with eight VLCC-capable terminals now proposed along the U.S. Gulf Coast. The three mentioned here appear among the most likely to actually be constructed, though we suspect that unless they are combined, only one of the Enterprise/Enbridge projects will be completed due to them being in direct competition with each other.

Turner, Mason & Company, continues to monitor project developments in the Midstream Sector. Our latest views are incorporated in our Crude & Refined Products and World Refining Construction Outlooks.  We published our first update this year in February with the next publication due to clients in August 2019. If you would like more information on this, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.