MIDSTREAM NEWS

Permian growth overwhelms pipeline capacity

According to ESAI Energy, production of crude oil from the Permian Basin will continue to outpace pipeline capacity in the region, keeping pressure on WTI Midland prices relative to WTI Houston. This constraint should be alleviated by 4Q17 as new pipeline projects come online.

ESAI Energy estimates production from the Permian Basin will grow over 420,000 b/d in 2017 and the acceleration in drilling activity will increase the basin's backlog of drilled but uncompleted wells (DUCs). Midstream companies are responding to the bottlenecks in getting the crude to market by expanding takeaway capacity. By the end of 2017, four new pipeline projects are expected to add over 800,000 b/d of capacity.

Enable signs transportation contract with Newfield

Enable Gas Transmission LLC (EGT), a wholly-owned subsidiary of Enable Midstream Partners LP, has entered into a 205,000 Dth/d firm natural gas transportation agreement with Newfield Exploration Co. The 10-year contract is associated with EGT's recently announced Cana and STACK Expansion (CaSE) project and is expected to start at an initial capacity of 45,000 Dth/d in early 2018, growing to the full 205,000 Dth/d of contracted capacity by the fourth quarter of 2018.

Open seasons for the CaSE project and the Kingfisher Extension project on the Enable Oklahoma Intrastate Transmission, LLC (EOIT) system closed on March 28. Enable is currently evaluating the bids received to determine customer demand for additional capacity.

Noble Midstream, Plains All American close on Delaware deal

Noble Midstream Partners LP and Plains All American Pipeline LP closed on the Advantage Pipeline LLC acquisition for $133 million through a 50/50 joint venture. Noble Midstream contributed $66.5 million, funded by available cash on hand and their credit facility, and Plains contributed approximately 1.3 million PAA units and $26.3 million cash.

Noble Midstream serves as the operator of the Advantage system, which includes a 70-mile crude oil pipeline in the southern Delaware Basin from Reeves County, TX to Crane County, TX with 150,000 barrels of daily shipping capacity (expandable to over 200,000 b/d) and 490,000 barrels of storage capacity.

In addition to existing customers, throughput growth is expected from an acreage dedication from Noble Energy and a volume commitment from Plains Marketing LP. Connections to Advantage from Noble Midstream's first central gathering facility and Plain's Wolfbone Ranch Station remain on schedule for completion in 2Q17.

Enterprise to build NGL pipeline from Permian to Mont Belvieu, TX

Enterprise Products Partners LP plans to build a new 571-mile pipeline to transport growing volumes of natural gas liquids (NGL) from the Permian Basin to Enterprise's NGL fractionation and storage complex in Mont Belvieu, Texas. The Shin Oak NGL pipeline will originate at Enterprise's Hobbs NGL fractionation and storage facility in Gaines County, Texas. The 24-inch diameter pipeline will have an initial design capacity of 250,000 barrels per day, expandable to 600,000 b/d. The project is supported by long-term customer commitments and is expected to be in service in the second quarter of 2019.

In addition to mixed NGL supplies aggregated at the Hobbs facility, the Shin Oak pipeline will provide takeaway capacity for mixed NGLs extracted at natural gas processing plants in the Permian region, including two Enterprise facilities that began service in 2016 and the Orla I plant that is scheduled to begin operations in 2Q18. In tandem with Enterprise's existing NGL pipelines, the new pipeline will also increase the company's capacity to transport purity NGL products from Hobbs to Mont Belvieu.

Enterprise's Mont Belvieu NGL complex offers access to approximately 130 million barrels of underground storage capacity, and 670,000 b/d of NGL fractionation capability. Enterprise is building a ninth fractionator at Mont Belvieu that will increase NGL fractionation capacity by 85,000 b/d following expected completion in 2Q18. Mont Belvieu is pipeline-connected to the US petrochemical industry on the Gulf Coast, as well as Enterprise's LPG and ethane deepwater marine export terminals on the Houston Ship Channel.

Fairway's Houston storage facility begins commercial operations

Fairway Energy Partners LLC has commenced initial commercial operation at its Pierce Junction Crude Oil Storage Facility.

Fairway began construction in 2015 to convert three existing underground storage caverns at the Pierce Junction Salt Dome in south Houston into crude oil storage service and to build out the supporting infrastructure to put the facility into commercial service.

The recently completed phase of construction (Phase 1A) allows for the storage of crude oil in three segregated caverns that have a total capacity of approximately 7.5 million barrels. Fairway constructed brine ponds with approximately 6.5 million barrels of capacity and central pumping and metering facilities at the site.

Phase 1A also included the construction of two separate bi-directional, 24-inch pipelines that will connect the facility to the existing Houston area crude oil grid. The pipelines connect the facility to the Genoa Junction and Speed Junction hubs. This is expected to enable Fairway to receive inbound crude oil from the Permian and Eagle Ford Basins, the Mid-Continent and Canadian regions as well as the Gulf of Mexico. The hubs also are expected to provide downstream connectivity to terminals, refineries and water outlets located in the Houston Ship Channel, Texas City and the Beaumont/Port Arthur market areas.

The facility's initial operating capacity is 70% subscribed.

IHS Markit: Canadian crude supply growth highlights need for new pipeline capacity

Western Canada may see a supply increase of nearly a million barrels of crude by 2020, putting increasing pressure on an already constrained pipeline system that has struggled with delay in bringing incremental pipeline capacity online, says a new report by IHS Markit.

The report examines the relationship between pipelines and prices, the implication of delay in new pipeline capacity that has occurred in western Canada and the current outlook for the industry.

Absent new pipeline takeaway capacity, Canadian crudes will face limitations from the existing pipeline infrastructure as Western Canadian volumes continue to build, the report says.

"The need for new pipelines departing Western Canada has not diminished with lower oil prices, quite the opposite," said Kevin Birn, energy director for IHS Markit. "Canada remains a growth story with production volumes increasing since the oil price collapse. And with continued growth it appears inevitable that volumes will overtake an already-constrained system and create a resurgence of crude-by-rail."

The report notes that transportation costs are a key reason why oil prices differ between regions. While quality differences-such as light versus heavy oil-result in price differences between different types of crude oils, transportation costs contribute to price differences between regions for crude of the same quality.

Capacity constraints in the past have contributed to price volatility, a rise of crude-by-rail shipments and a loss of economic value for Western Canadian producers, the report says. During one such period of constraint-a five-month period starting November 2012 through March 2013-Western Canadian Select crude realized approximately $30/bbl less than Mexican Maya, a crude of similar quality. The difference in price equaled approximately $6 billion in lost revenue over that period.

A survey of recent major pipeline proposals conducted for the report found that the length of the pipeline review process (from first application through the end of 2016) has averaged more than five years per project, creating uncertainty for project proponents and western Canadian producers alike.

Although the recent approvals of Keystone XL by the Trump Administration and Trans Mountain Expansion by the Government of Canada have returned a level of optimism for pipeline projects, potential for additional delays exists, the report says.

If four major pipeline projects (Alberta Clipper Expansion, Energy East, Keystone XL and TransMountain Expansion) advance as currently proposed, they could add 2.9 million barrels per day of new capacity between 2019 and 2022, enough to move Western Canadian pipeline takeaway capacity from shortage to surplus.

The report notes that, although the United States (the Gulf Coast in particular) remains the most likely market for growing Canadian heavy production due to the regions pre-existing refinery capacity capable of processing heavier crudes, lessons from the timing of Keystone XL and concerns over a possible resurgence of US protectionism have highlighted the importance of market diversification.

As none of the currently proposed pipeline would come online prior to 2019, a resurgence of crude-by-rail shipments out of Western Canada is likely to occur through the end of the decade, the report concludes.

"Greater price discounts for Western Canadian crudes would return with an increase of crude-by-rail shipping," Birn said. "Such discounts are likely to be more modest than in previous years as past investments in crude-by-rail infrastructure-such as loading terminals and railcars-would pay off. But the fact remains that you will still see increased price volatility and loss of value for producers until adequate pipeline capacity is restored."

Tallgrass acquires additional interest in Rockies Express Pipeline

Tallgrass Energy Partners LP acquired an additional 24.99% membership interest in Rockies Express Pipeline LLC (REX) from Tallgrass Development LP $400 million, bringing its ownership interest to approximately 50%.

Tall Oak expands STACK footprint

Tall Oak Midstream II LLC is executing a growth plan in Oklahoma's Northwest STACK play. The buildout of Tall Oak's Midcon System will span seven counties in northwest Oklahoma: Alfalfa, Woods, Major, Woodward, Dewey, Custer and Garfield. Acreage dedications to Tall Oak in the multicounty region have reached approximately 500,000 net acres and are expected to grow. Tall Oak is backed with $400 million in equity capital commitments from EnCap Flatrock Midstream. The news follows Tall Oak's July 2016 acquisition of Caballo Energy's Eagle Chief System, now known as the Midcon System. Since then, Tall Oak has added over 100 miles of natural gas gathering infrastructure and a new compressor station. The gathering system now includes over 600 miles of pipeline, multiple compressor stations, and two processing plants. Tall Oak currently has two additional compressor stations and multiple pipelines under construction, with three additional compressor stations and an additional 100 miles of new gathering pipelines planned for 2017.