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Rockies Oil JV Displays Kinder Morgan/Tallgrass Ties, Could Support Gas Revenues

Source: Allison Good, S&P Global

January 22, 2019: A new crude oil pipeline system out of the Rocky Mountains being developed by Kinder Morgan Inc. and Tallgrass Energy LP makes use of the companies’ long-standing ties and could boost their natural gas pipeline rates, analysts said.

By converting portions of Kinder Morgan’s Wyoming Intrastate Co. and Cheyenne Plains Gas Pipeline Co. LLC into crude service, the joint venture to transport supplies from the Powder River, DJ, Williston and Western Canadian production basins to the Cushing, Okla., oil hub should help the partners’ gas pipelines get better rates when they recontract firm capacity.

“You’re eliminating a significant amount of egress capacity out of the Rockies by doing this project,” midstream analyst Matthew Lewis at the Denver-based East Daley Capital Advisors Inc. said in an interview. “When you shut down Cheyenne, you automatically help other pipes like [Kinder Morgan’s Colorado Interstate Gas Co. LLC] and parts of [its Wyoming Interstate Co. LLC pipeline], in addition to [Tallgrass’ Rockies Express Pipeline LLC], which needs to re-contract in 2019.”

Kinder Morgan should “make significantly more money” off Cheyenne as a crude oil pipeline, he added.

The consolidated system would carry up to 800,000 barrels per day of light crude oil and 150,000 bbl/d of heavy crude oil from points in Wyoming and Colorado to Tallgrass’ and Kinder Morgan’s Deeprock terminal in Cushing beginning in 2020. It is also expected to help Kinder Morgan’s struggling Ruby Pipeline LLC, which transports gas to Oregon and northern California, Lewis said.

The looming bankruptcy of California’s largest utility, which is Ruby’s largest shipper, has already prompted one rating agency to downgrade the pipeline’s credit to junk status as PG&E Corp. and subsidiary Pacific Gas and Electric Co. face billions of dollars in liability costs for recent wildfires.

Combining Kinder Morgan’s pipelines and Tallgrass’ Tallgrass Pony Express Pipeline LLC would provide an additional 550,000 bbl/d of crude transportation takeaway capacity from the Rockies, reflecting the midstream firms’ existing ties. “Recall that Tallgrass was birthed from [a Federal Trade Commission] divestiture out of Kinder Morgan and that [Tallgrass] CEO Dave Dehaemers used to be the [Kinder Morgan] CFO,” Robert W. Baird & Co. Inc. midstream analyst Ethan Bellamy said in an email. “There’s [a] deep understanding between these two companies, not to mention asset synergy for a project like this.”

Connecting to the pipeline system to Gulf Coast and export markets through Tallgrass’ proposed Seahorse pipeline could also improve that project’s prospects, he added.

Midstream analysts at Morningstar Inc. agreed and said in a Jan. 22 note to clients that the joint venture “represents a major vote of confidence” in the Seahorse pipeline, which would serve a separate new export-capable liquids terminal near the mouth of the Mississippi River.