Some of the largest pipeline operators in the U.S. have started to offer sweeter deals for crude oil shipment to producers as the midstream sector vies to curb its losses and keep its relevance amid the oil demand and production decline.
Pipeline companies, including Magellan Midstream Partners, Enterprise Product Partners, and Energy Transfer, have cut shipment rates in contract negotiations or have offered more advantageous rates in current contracts to U.S. oil producers to keep their customers amid a pipeline overcapacity and an overall slump in oil demand and oil production in the United States, Reuters reported on Wednesday.
Magellan Midstream Partners has even offered to its customers the option to ship crude on its pipeline only when market conditions are favorable, according to Reuters. This approach differs from the typical take-or-pay contracts between an upstream and a midstream company for moving oil out of a production center.
Caught between production curtailments and bankruptcies in the U.S. shale patch and reduced demand for fuels from the downstream, pipeline operators have seen pipeline utilization rates and their revenues fall this year.
After the oil price crash in March, 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.
The latest announcement of a canceled oil pipeline came from Enterprise Products Partners, which said earlier this month that it was scrapping the 450,000 barrels per day Midland-to-ECHO 4 crude oil pipeline project.
Current pipeline capacity in the Permian is exceeding production so much that in a year or two, when pipelines currently under construction are completed, Permian producers could find themselves using just half of the available takeaway infrastructure, according to analysts.