“Lower Oil Production Hits Pipeline Operators Hard” by Tsvetana Paraskova

[Tom Nolan + 2,443]

While I can’t pronounce her name well, over the years Tsvetana Paraskova has put out some well written articles.  I enjoy reading her stuff.  This article gives us some interesting insight.  

An ASIDE - With the depressed oil prices, the miners (e.g. gold, silver, copper) have a reduced operating cost of about 25% which really heightens their profit margins in this new decade.

Lower Oil Production Hits Pipeline Operators Hard

https://oilprice.com/Energy/Crude-Oil/Lower-Oil-Production-Hits-Pipeline-Operators-Hard.html

Just two years ago, U.S. pipeline operators were rushing to build pipelines in Texas to move surging Permian oil and gas production to the refining and export centers on the Gulf Coast.    This year’s crash in oil demand and prices led to a U.S. shale production decline as many operators in all major shale plays curtailed output to sit out the sub $40 oil prices at which they don’t make money. The shale production crash spilled over to the midstream sector, which was caught between falling oil production and pipeline utilization from the upstream and crumbling demand for fuels in the downstream.

Something had to give in the U.S. midstream sector. And it did. Pipeline infrastructure companies started to announce deferrals of final investment decisions and start-up dates for planned oil and gas pipelines, especially in the Permian, which suddenly found itself with a overbuild of capacity as production and consumption of oil struggled to recover from the pandemic-driven crisis.

On top of the growing pile of canceled pipeline projects, the U.S. midstream is ripe for consolidation with increased competition and weakened financial profiles of some operators, analysts and industry executives say.

The U.S. energy infrastructure sector also faces contractual risks as bankruptcies in the upstream increase, as well as regulatory risks with delayed pipeline approvals and the upcoming U.S. presidential election.

Pipelines Not Immune To Price Crash  

The distress in the exploration and production (E&P) sector spread to the midstream, Alex Beeker, Principal Analyst, Corporate Research at Wood Mackenzie, said in June.

“For midstream companies that made huge investments based on pre-Covid-19 production forecasts, low utilisation now presents a challenge. Midstream infrastructure projects, many of which were financed with high levels of debt, will struggle to deliver projected returns. And cash flow is falling in tandem with utilisation, limiting the ability of the midstream to increase distribution,” said Beeker.

The recovery will not be speedy, according to oil and gas data analytics company Enverus.

The upstream slashing capex and companies going bust at these low oil prices raises the contract and throughput volume risks for the pipeline operators, Enverus said in a report on the U.S. midstream last month.

“It’s been a tough year for the industry and a rebalance will be anything but quick,” Bernadette Johnson, vice president of Strategic Analytics at Enverus, said.

“Somewhat caught in the middle between struggling E&P companies and the historical drop in demand from consumers, due to COVID-19, the midstream sector in particular is also vulnerable to regulatory threats, legal rulings and a challenging pipeline permit approval process,” Johnson added.

Pipeline Projects Canceled 

To weather the current crisis, the midstream sector is also slashing capital expenditures to protect weakened balance sheets. This has led to deferrals or outright cancelation of pipeline projects. 

The latest announcement of a canceled oil pipeline came from Enterprise Products Partners, which said that it was scrapping the 450,000 barrels per day Midland-to-ECHO 4 crude oil pipeline project.

The cancellation of the project is set to save the company around US$800 million in aggregate growth capital expenditures for the period 2020-2022.

“The capital savings from the cancellation of M2E4 will accelerate Enterprise toward being discretionary free cash flow positive, which would give us the flexibility to reduce debt and return additional capital to our partners, including through buybacks,” A. J. Teague, co-CEO of Enterprise’s general partner, said.

As of April, Enterprise Products Partners had canceled or deferred spending on 13 projects, deferring Midland-to-ECHO 4, but Teague insisted back then that the project was “not cancellable” as it was underpinned by long-term contracts. 

But within five months, Enterprise Products did cancel the project, preferring to save capex and cut debt instead of waiting for the demand recovery, which now everyone knows will not be V-shaped.

Consolidation Is On The Horizon

In this period of lower shale production and lower demand from consumers, pipeline operators will be moving toward optimization instead of growing volumes and adding overcapacity in pipeline infrastructure, executives say.

According to the chief executive of Plains All American Pipeline LP, Willie Chiang, consolidation is coming in the midstream sector.

“We’re at the point now where I think we are shifting out of growth and going toward optimization,” Chiang said at the Barclays CEO Energy - Power Conference last week, as carried by Houston Business Journal.

“I do think as we go forward, more consolidation will happen,” Chiang said, adding that acquisitions were not a top priority for Plains All American Pipeline. Still, a strategic joint venture is a priority when the company looks at opportunities ahead, he noted.

In the first half of 2020, the midstream segment accounted for 38 percent of the volume and 66 percent of the value of oil and gas deals, according to PwC’s report ‘Oil and gas deals insights: Midyear 2020.’ But two of the large midstream deals were essentially changes in the corporate structure and were both announced before the pandemic.

Going forward, PwC forecasts that “Increasing project costs as a result of lengthy litigation processes, and the regulatory uncertainty pending the US Presidential Election could lead to divestitures in the segment.”

“We expect private equity and infrastructure investment funds to be active in the second half of the year,” PwC said. 

By Tsvetana Paraskova for Oilprice.com

[mikeaddy + 1]

About two years ago, U.S. pipeline operators were rushing to build pipelines in Texas to move surging Permian oil and gas production to the refining and export centers on the Gulf Coast. This year’s crash in oil demand and prices led to a U.S. shale production decline as many operators in all major shale plays curtailed output to sit out the sub $40 oil prices at which they don’t make money.