April 8, 2020

Last week in Court Asks Whether It Should Stop Flows On Dakota Access Pipeline, we discussed how the recent crude market price drop could impact flows out of the Bakken. On Friday, we will be analyzing the legal arguments for and against the forced production cuts in crude requested by Pioneer Natural Resources and Parsley Energy at the Texas Railroad Commission. Today we look at how the falling prices and falling production could impact the development of pipeline projects that we highlight monthly in our Permian Edge reports.

Our Permian Edge reports are designed to be a dashboard for all of the pipeline projects that have been proposed to provide takeaway capacity from the Permian region for crude, NGL and natural gas. In those reports, we provide a project commitment score that we developed to indicate how committed the project sponsor is to a particular project. The higher the score, the more likely we view the project as going forward. Today, however, we take that process one step further to provide our views on whether the projects are likely to be deferred or canceled as a result of the recent market changes. As we discuss below, our view is that the current market conditions will ultimately result in the deferral or cancellation of six projects: the natural gas pipelines, Pecos Trail and Permian Pass; the NGL pipelines, BANGL and Companero; and the crude lines, Jupiter and Voyager.

Market Changes Create Need for Capital Discipline

Following the reduction in crude prices that occurred in March, companies predictably announced revised capital plans for 2020 and the near future. An example of those companies with ties to the Permian projects we follow include Targa, Tellurian, Energy Transfer, Diamondback, Enterprise Product Partners, Magellan, Plains All American Pipeline, Energy Transfer and Phillips 66 Partners.

Targa announced an immediate 32% reduction in planned 2020 capital expenditures, with an additional 76% reduction from that reduced amount for 2021. Tellurian expressed confidence in its long term plans, but instituted a revised organizational structure that it said would give it “a long runway to execute” on its business model. Diamondback announced a 50% reduction in rigs from earlier in the year and approximately that same percentage reduction in its midstream capital budget for 2020. Energy Transfer said that approximately $500 million of growth capital is currently being evaluated for delay to 2021/2022.

Announced Changes to Project Timing

The partners in Red Oak Pipeline, a crude pipeline project, have announced that they were formally deferring any further development of that project, at least for now. One of those partners, Plains All American Pipeline, said that the partners have suspended actions that would require additional capital spending on the project and “will re-evaluate demand for the project in light of recent market developments.” The other partner, Phillips 66 Partners, simply said the project had been deferred. However, both partners asserted that the project was not formally canceled, but that any future decision to move forward would depend on a number of factors, including customer volume commitments, project returns and capital allocation considerations. Clearly, if those hurdles are not overcome, the project at some point will need to be abandoned, and any investment to date would need to be written-off.

While only Red Oak has been formally deferred, we believe that many of the other projects we are monitoring, which already had a commitment score that was lower than Red Oak’s 38 as of last report, will likely need to make a similar decision. Based on our expectations of these projects, we have reconfigured our current stack of additional capacity to take into account the deferrals/cancellations that we anticipate.

Crude

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As seen above, we would expect that the Voyager and Jupiter pipelines are the two crude pipelines at highest risk for being canceled. Both of these projects had commitment scores below 20 in our most recent report, which would indicate that they had not yet moved from the concept phase. This makes it easier for the project proponent to simply stop work on the project. However, because these projects had not been much more than announced, we may never hear that they have been formally canceled or even deferred. For Red Oak, we have “deferred” its originally projected in-service date by two years to give the market some time to recover.

Natural Gas

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As seen above, the two natural gas projects we view at most risk are Pecos Trail and Permian Pass. Even before the recent market turmoil, Kinder Morgan had indicated that Permian Pass had no shippers under contract, and our LawIQ commitment score was just 3. Pecos Trail had a commitment score of just 11, and had announced it expected to make a final investment decision last year. The fact that no such announcement was made prior to the drastically changed markets makes it less likely that one could be reached now. Permian Global remains viable only because of the long runway Tellurian has for the project, which doesn’t call for it to be in-service until 2024, which may give the markets time to recover. The one project we will be watching carefully in this group is Whistler Pipeline, which had just begun to acquire the needed rights of way before the market changes. Whether it will continue to proceed on that path bears watching.

NGL

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As seen above, we think that the recent market events may seriously impact the progress of the Companero and BANGL projects. Companero had a commitment score of 26, but since it received authority to begin construction from the TRRC last year, we simply have not seen the activity one would expect in a project at this stage of development. BANGL had a commitment score of 3 and had not yet made a final investment decision. Any final investment decision just became much more difficult to make in the light of the changed market conditions.

Our Permian Edge reports will be coming out next week. For now, we will continue to include all six of these at-risk projects in those reports until there is some public indication that the projects will not be moving forward. If you are not currently receiving our Permian Edge reports, but would like to, please let us know.