Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Texas oil pipelines face dry months as production languishes

Published 04/13/2021, 01:09 AM
Updated 04/13/2021, 06:11 AM
© Reuters. FILE PHOTO: A sticker reads crude oil on the side of a storage tank in the Permian Basin

© Reuters. FILE PHOTO: A sticker reads crude oil on the side of a storage tank in the Permian Basin

By Devika Krishna Kumar

NEW YORK (Reuters) -Nearly half of all oil pipelines from the Permian basin, the biggest U.S. oilfield, are expected to be empty by the end of the year, analysts and executives said.

Pipeline companies went on a construction spree throughout 2018 and 2019 to handle blistering growth in U.S. crude production to a record 13 million barrels per day (bpd). However, the coronavirus pandemic crushed both fuel demand and oil production, and neither have recovered fully, leaving many pipelines unused.

Major pipeline companies are exploring ways to ship other products in those lines and considering selling stakes in operations to raise cash.

The coronavirus pandemic upended the global energy supply system and worldwide fuel demand. U.S. gasoline consumption is now estimated to be past its peak and as refiners process less crude, producers are not filling pipelines used to transport it.

By the fourth quarter, total utilization of the largest oil pipelines from the Permian is expected to drop to 57%, consultancy Wood Mackenzie said. The nadir during the last market bust in 2016 was roughly 70%.

U.S. crude output is currently about 11 million bpd, and is not expected to grow much until 2022. But more pipelines were already set to come online, growing the gap between production and capacity covered by long-term contracts to a record over 1 million bpd in February, according to energy research firm East Daley Capital.

"We do not expect to be at pre-COVID production levels by end-2022," said Saad Rahim, chief economist at commodities merchant Trafigura.

REVENUES HIT

The top three Permian pipeline companies are offering discounts to entice shippers and stem the fall in volumes. Companies rely on long-term contracts that require customers to ship a certain volume of oil or pay a penalty. Now companies are renegotiating those agreements at lower rates when they are close to expiring, to keep their customers.

Magellan Midstream (NYSE:MMP) Partners LP's transportation and terminals revenue slid 9% to about $1.8 billion in 2020, the lowest since 2017. The company has only enough long-term contracts to fill its 275,000-bpd Longhorn pipeline to 70% capacity over the next six years, Magellan said.

With more pipelines adding to competition, Magellan expects daily volumes on Longhorn to drop to an average 230,000 bpd this year versus 270,000 bpd in 2020. A Magellan spokesman said the company could use its marketing arm to buy space on the Longhorn line and sell it to ad-hoc buyers.

Plains All American Pipeline LP's transportation revenues fell about 13% to $2 billion in 2020, and warned that earnings could suffer further if production declines. Plains did not comment for this story.

Pipeline companies can make some money even when oil is not flowing through pipelines. Producers pay what are known as deficiency payments - penalties for not shipping oil. Still, those payments are small. Plains reported $71 million in deficiency payments in 2020, less than 4% of its overall transportation segment revenue.

Some companies are considering retrofitting pipelines to ship liquids besides crude, such as renewable fuels.

Enterprise Products Partners (NYSE:EPD) LP's co-Chief Executive Jim Teague recently told analysts that he was fielding queries from a petrochemical company that needs pipeline transport and storage for potential hydrogen projects.

Enterprise's crude pipelines and services revenues plunged 35% in 2020. In February, it said it has long-term contracts to ship about 1 million bpd through 2028 and beyond, compared with average volumes of 2 to 2.2 million bpd over the past two years.

The company did not comment for this story.

© Reuters. FILE PHOTO: Pipelines run to Enbridge Inc.'s crude oil storage tanks at their tank farm in Cushing

As pipeline companies have struggled, investor returns have suffered. The Alerian MLP index, which tracks the performance of midstream companies, is down 24% since the beginning of 2020, compared with a 27% return for the S&P 500.

"A lot of companies had to cut their dividends," said Rob Thummel, senior portfolio manager at TortoiseEcofin. "It has created some skepticism on the investor base about the sustainability of the sector."

Latest comments

EPD hardly has any debt.  Pre-Covid was spending billions of dollars on CapEx. reducing Capex has allowed EPD to keep its Dividend untouched. EPD, thanks to its super healthy balance sheet, and extremely conservative management team, remains by far the safest investment in the sector.
Inaccurate article!! No mention of biden’s anti-oil executive orders which have crippled the oil industry !!!
Awe, no more government tax payer handouts and you all start crying. Thought you hated socialism
 I believe it is true that Industry leaders are now ready for a push into "renewables".  Hence politicians are told to do their bit and are now permitted to criticise the oil industry. However, contrary to a wide-spread belief, we will remain massively dependent on fossil fuels. Globally we are still a long way from being able to stop using coal! I believe there are opportunities in the energy sector today. In particular I am LONG EPD, and looking to add at $22-$23.- I believe the 9ish dividend yield is safe.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.