The Daley Note: January 20, 2023
Recently, ONEOK (OKE) surprised the energy sector with the announcement of a massive pipeline designed to export Permian natural gas to Mexico and sell volumes globally as LNG.
OKE on Dec. 20, 2022 filed a presidential permit application with the Federal Energy Regulatory Commission (FERC) for the Saguaro Connector Pipeline, representing the US side of the export plan. “Blue Ocean” could be a better name for the project, as a literal grab for overseas markets and in honor of the Blue Ocean business strategy, which counsels going bold to open uncontested market space. If Permian natural gas were to reach the Pacific Ocean one day, it would open new dynamics for supply and pricing in the basin.
For now, the project is big on ambition but light on detail. With the Saguaro Pipeline announcement, OKE appears to be jumping ahead of other LNG project developers with designs to connect Permian gas supply to Pacific Basin LNG markets.
According to OKE, the proposed 155-mile pipeline would be super-sized at 48 inches and be capable of transporting up to 2.8 Bcf/d. The intrastate pipeline would stretch from the Waha hub in the Permian to the US-Mexico border in Hudspeth County, TX. Saguaro would then connect OKE’s WesTex system to a proposed pipeline on the Mexico side of the border and transport gas to a yet-to-be-disclosed LNG export facility (or facilities) planned on the Pacific Coast. Based on the proposed pipeline size, the project likely is targeting multiple LNG developers as potential customers. OKE said it expects to make a final investment decision on the pipeline by mid-2023.
Pipeline capacity from the Permian Basin to Mexico is already plentiful. East Daley forecasts Permian flows to Mexico currently run at ~42% utilization (see figure). Without new demand sources like LNG, the Saguaro pipeline is likely unnecessary. Developers have announced plans for four new LNG facilities on Mexico’s Pacific Coast that could add considerable demand and serve as potential counterparties:
- Sempra Energia Costa Azul Phase 1 and Phase 2: 0.43 and 1.60 Bcf/d, respectively.
- Amigo LNG: ~1 Bcf/d
- Mexico Pacific facility Phase 1 and 2: 1.25 Bcf/d (0.625 Bcf/d per phase)
- Sempra Vista Pacifico: 0.55 Bcf/d
Of these projects, only Sempra Energy’s (SRE) Costa Azul Phase 1 has been sanctioned so far. The project is under construction and will add liquefaction to the existing Costa Azul import terminal in Baja California. SRE is targeting the start of operations in mid-2025. The three other Pacific Coast LNG export proposals are in earlier stages of development, but one day could add up to 4.8 Bcf/d of additional demand from Mexico. For Permian producers, that new market could be a long-term game-changer.
For now, East Daley expects Permian natural gas egress to remain constrained through 2023 until expansions to current infrastructure come online later this year and Matterhorn Pipeline begins service in 2024. In all, we project 3.7 Bcf/d of new egress capacity will be added by the end of 2024 in the Permian Basin. – James Taylor Tickers: OKE, SRE.
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We provide an overview of rate cases: their purpose, how and when rate cases are likely to be initiated, as well as the process, timing and potential outcomes. We then review recent case trends across the industry, using activity within the portfolio of Kinder Morgan (KMI) to illustrate rate risk and the impact at the entity level from an investor perspective. Register here.
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