“And like in the current crisis, liquidity is king,” Phillips 66 chairman and chief executive Greg Garland said on the company’s Q1 conference call in early May.
Like the upstream, America’s midstream sector is also grappling with preserving liquidity in response to unprecedented market conditions. The oil price and demand crash in the COVID-19 pandemic caught up with U.S. energy infrastructure plans as oil and gas producers slashed budgets and drilling activity.
In response to expected lower throughput volumes and in an attempt to preserve liquidity, Phillips 66 and other midstream operators in the United States have recently deferred in-service dates and final investment decisions on several oil pipelines and scaled back the capacity of others.
According to the Energy Information Administration’s (EIA) latest update of its Liquids Pipeline Projects Database, five pipelines in the U.S. and such crossing into Mexico were on hold as of June 4.
Last year, a total of 14 crude oil pipelines were completed, up from 11 in 2018, as midstream operators seized the opportunity to expand pipeline infrastructure to take surging oil production from the Permian basin to the refinery and export centers along the U.S. Gulf Coast.
This year through April, three crude oil pipeline projects were completed, and all of them were new pipeline projects, not extensions of existing pipelines, according to the EIA’s database.
‘Liquidity Is King’
Over the past few weeks, however, midstream operators have started to announce actions to reduce capital expenditures amid crashing oil prices. Those actions included a deferral of several pipeline projects.
Phillips 66 said at the end of March that it was reducing the 2020 consolidated capital spending by US$700 million to US$3.1 billion. As a result of the cost cuts, the company deferred the Red Oak Pipeline—a 50/50 joint venture project with Plains All American Pipeline to ship 400,000 bpd of crude oil through a pipeline system from Cushing, Oklahoma, and the Permian Basin in West Texas to the Texas Gulf Coast.
Phillips 66 Partners’ Liberty Pipeline in a joint venture with Bridger Pipeline, with planned capacity of 350,000 bpd of crude oil from Guernsey, Wyoming, to Cushing, was also deferred. Liberty Pipeline is designed to provide crude oil transportation service from the Rockies and Bakken production areas to Cushing. Phillips 66 Partners has also postponed its final investment decision on the ACE Pipeline – a joint venture of Phillips 66 Partners, Harvest Midstream, and PBF Logistics – with a planned capacity of 400,000 bpd in Louisiana.
“We’re focused on conserving cash and maintaining strong liquidity to manage through this unprecedented down cycle,” Phillips 66 chief executive Garland said on the earnings call on May 1.
Enterprise Products Partners deferred the 450,000 bpd Midland-to-ECHO 4 Pipeline by around half a year, and it is currently forecast to go into service in the second half of 2021.
As a whole, the company has canceled or deferred spending on 13 projects, it said in its Q1 earnings presentation. Enterprise Products Partners does not believe that Midland-to-ECHO 4 is a project that could be canceled as long-term contracts underpin it.
“So in our mind not cancellable,” director and co-chief executive officer A. J. Teague said on the earnings call.
‘I have never seen anything like what we are going through now’
“I’ve been through many cycles in my life, but I have never seen anything like what we are going through now. Demand literally fell off a cliff in March. Seems like it was overnight. As demand cratered, our good buddies; Russia and Saudi Arabia piled on by pumping an additional 4 million barrels a day of crude oil into the market and the result was what no one would have ever guessed, negative price crude oil,” Teague said at the end of April.
Energy Transfer, for its part, said in May that it was scaling back the Ted Collins crude oil pipeline into the Ted Collins Link, which “will reduce capital spend and increase the utilization of existing assets, while providing the same market connectivity between our Nederland and Houston terminals.”
Ted Collins will be cheaper and will transport up to 275,000 bpd from West Texas and Nederland to Energy Transfer’s Houston terminal and is expected to be in service in Q4 2021.
Many other oil and natural gas pipeline projects across America remain on track despite the market conditions.
Recent regulation from the U.S. Administration, however, could influence the timelines and decision-making of new oil and gas infrastructure projects going forward.
New U.S. Administration Rules Set To Impact Project Timelines
The Trump Administration has recently issued a final rule benefiting oil and gas companies by narrowing the scope of review for proposed oil and gas pipelines that states should consider under a section of the Clean Water Act for energy infrastructure.
But another final rule, from the U.S. Federal Energy Regulatory Commission (FERC), says that an approved natural gas project cannot proceed with construction until the commission acts on all requests for rehearing. This new rule is likely to delay the construction of natural gas pipelines and increase the costs for the project owners, analysts and legal experts say.
While many oil and gas pipeline projects remain on track, several deferrals over the past few months show that the midstream sector is not immune to the crisis in the upstream industry.