Source: E&E News Reporter, September 21, 2020
Five months after oil prices briefly went negative for the first time in history, the fate of several planned pipelines in the nation’s largest onshore oil patch is in question as demand remains low.
On Sept. 9, Enterprise Products Partners said it was canceling its Midland-to-ECHO 4 pipeline, which would have been capable of transporting up to 450,000 barrels of crude per day from Midland, Texas, to the Houston area. Earlier this year, Phillips 66 announced it was deferring two planned pipelines, and at least three other projects in the Permian Basin previously slated for construction in 2020 are now assumed delayed, according to a June 22 research note from Morningstar Inc.
While industry groups expect the pipelines sector to bounce back, analysts say there are some signs that point to more sustained uncertainty for new oil projects as the market faces a glut of supply exacerbated by the pandemic.
Midland-to-ECHO 4 had even accepted a final investment decision before Enterprise Products said it would toss out the project to cut capital expenditures, said David Braziel, president of RBN Energy LLC. Typically, delays or cancellations would happen before such a decisive step, he said.
“It’s pretty unusual for midstreamers to change their minds,” Braziel said.
How long the midstream sector will stay in limbo is up for debate. Rystad Energy forecasts that there will be “no room for new infrastructure” in the U.S. until at least late 2021 or early 2022, while RBN Energy predicts there will be little need for additional pipelines in the next five years. “The days of giant new pipelines going from concept to reality are numbered, at least in the near term,” Braziel said.
While major pipelines that are near completion or fully financed are expected to advance, additional cancellations could hit already-stalled projects such as Phillips 66’s Red Oak and Liberty pipelines, said Kendrick Rhea, senior manager of advisory services at East Daley Capital Advisors. “Based on supply and demand outlook, we’d expect them to be canceled as well,” Rhea said.
On the other hand, some pipeline delays might have happened this year even without a pandemic, analysts note. U.S. oil basins were facing overcapacity before the onset of COVID-19 restrictions, Rhea said, a trend that was made worse by the plunge in oil prices in March and April.
The fate of individual projects should not necessarily be viewed as indicative of the long-term outlook for the midstream portion of the oil and gas industry, said Robin Rorick, vice president of midstream operations at the American Petroleum Institute. Some analyses have also shown that the market could recover next year, Rorick said. “At the end of the day, we don’t really view this as a new normal,” he said. “We view it as a question as to when the recovery will actually take place.”
Recent reports suggest an uncertain future for oil overall. The International Energy Agency this week cut back its 2020 forecast for oil demand by 300,000 barrels per day, and a report last month from Haynes and Boone LLP said bankruptcy filings among oil producers in the U.S. increased 62% in the last year (Energywire, Sept. 16).
There is also growing opposition to new pipeline projects among affected communities, including in oilproducing states historically seen as favorable regulatory and legal environments for building pipelines, said Roddy Hughes, senior campaign manager at the Sierra Club’s Beyond Dirty Fuels campaign. “One of the shifts we’ve been seeing in the last six months is that front-line communities don’t see oil and gas as the future, and they’re looking to move on,” Hughes said. Although the chill in new pipeline infrastructure could prove temporary, regulatory and permitting challenges from environmental groups and others could hamper pipelines for years, Braziel said.
“You can’t separate the long term from the short term,” he said. “There’s really the confluence of two massive shifts that are going on right at the same time.”