The midstream energy sector is delaying pipeline projects, shedding costs and anticipating large drops in crude volumes as a challenging earnings season for the pipeline players picks up at the end of April.

The North American midstream industry is weighing whether it overbuilt pipelines out of the Permian and other basins before the global oil demand collapse from the coronavirus pandemic, while simultaneously considering whether to construct new storage space as capacity rapidly fills up from the historic supply-demand gap.

If storage constraints are not resolved, NYMEX WTI crude prices, and spot crudes, could still fall into negative pricing again as happened for the first time ever on Monday.

"I'd be surprised if you see any major pipeline work get the go ahead in North America for at least this year," said Edward Moya, senior market analyst with OANDA.

While minimum-volume commitments in contracts may guarantee some extra cash flow for the midstream sector during this oil price crash, the producers and pipeline players are still inextricably linked, said Pearce Hammond, an analyst with Simmons Energy. Even then, some producers may declare force majeure in an attempt to cancel many of their crude volume commitments, he said, or crude buyers could claim force majeure when they have nowhere to store it.

"I'm a big believer that the midstream sector is only going to be as healthy as their customers," Hammond said. "This is a group that in the last few years has built a lot of infrastructure with the belief that US production is growing, not declining. And they've built that with debt."

As US crude exports begin to decline, the pandemic has upended what was a race to build the first deepwater terminals offshore of the US Gulf Coast to ship crude overseas.

"I don't know why we'd need any of them at this point," Hammond said.

If only one is built it likely would be Enterprise Products Partners' and Enbridge's Sea Port Oil Terminal, called SPOT, offshore of the Houston area.

If the midstream sector moves on any new construction at all - apart from what's already funded - it is likely to come in the form of new storage facilities to accommodate the growing glut of crude oil, gasoline and other products that could be needed for many months to come, but not necessarily longer term.

US commercial crude storage is at more than 60% capacity and quickly rising, US Energy Information Administration data shows. The key US storage and trading hub in Cushing, Oklahoma is at nearly 80% and essentially booked up through leases. North America could effectively be out of commercial storage by late May.

Energy companies are weighing their options and most are declining comment for now, possibly waiting to reveal more during the upcoming wave of earnings calls.

"We are actively evaluating opportunities to add or convert existing storage to crude oil service to meet the needs of our customers," said Magellan Midstream spokesman Bruce Heine.

CUTBACKS AND DEFERRALS

While the upstream sector has led the charge, midstream firms are making big cutbacks to their capital spending and delaying projects as well.

The oil-weighted Plains All American Pipeline and Targa Resources slashed their spending by one-third; ONEOK by 20%; Western Midstream by 45%; and DCP Midstream by 75%, among others. Many more reductions are on the way, analysts said.

A few pipeline projects with Phillips 66 were all delayed for at least a year: the Red Oak Pipeline with Plains to transport Permian and Cushing crude to the Texas Gulf Coast; the Liberty Pipeline with partner Bridger Pipeline to stretch from Wyoming to Cushing; and the ACE Pipeline system in Louisiana with Harvest Midstream and PBF.

With new crude oil pipelines recently coming online from the Permian, analysts said one key litmus test is whether the Wink-to-Webster Pipeline that was slated to begin construction later this year will move forward with its backing from partners ExxonMobil, Plains, MPLX and others.

In Canada, Keyera Corp. just delayed the planned Key Access Pipeline System, called KAPS, and Pembina Pipeline deferred expansions of its Peace Pipeline system.

More delays and cancellations are expected, analysts said, as producers shut-in more crude oil production throughout North America.

ConocoPhillips, Occidental Petroleum, EOG Resources and Canada's Husky Energy and Suncor have announced some of the biggest production reductions in North America thus far.

During a Texas energy regulatory hearing last week, Plains President Harry Pefanis warned that up to 4 million b/d of US oil production could be forced offline via shut ins. Plains is asking producers to voluntary cut back production and requiring customers to show proof of market at destination.

"There's a wall coming and you have to be proactive," Pefanis said.

Texas, Oklahoma, New Mexico and others are all relaxing rules to let producers shut-in more production for now without breaking contracts and leases.

Still, the midstream space is at least in a somewhat improved situation versus most of the suffering energy sector because of long-term contracts that will keep at least some cash flow coming in for some time.

"Midstream is in a better position because of some of the contracts," said Stacey Morris, energy research director at Alerian. But those volume-commitment contracts still only go so far. "Weathering this environment all comes down to your asset base, customers, liquidity and overall financial strength."

The first-quarter earnings won't be too tough for the industry because the pandemic only took hold worldwide in March, she said, but the second and third quarters will prove much more painful.

CANADIAN CONCERNS

The midstream sector may face even more challenged problems in Canada.

While US refineries are cutting their volumes by more than 20%, their Canadian counterparts have implemented roughly 40% run cuts on average, said Matthew Taylor, an energy analyst with Tudor, Pickering, Holt & Co.

Canadian producers will need to cut back their crude volumes by more than 1 million b/d to keep up with declining refining demand, he said.

Even leading pipeline firm Enbridge doesn't have any apportionment in May on its Mainline pipeline system from Alberta to the US and eastern Canada because of falling volumes as upstream firms shut in production.

Canadian oil pipeline utilization is typically more than 90% and it should soon fall to about 75%, Taylor said.

Some of the mid-sized pipeline operators such as Keyera, Pembina and Inter Pipeline are most exposed to the oil sector's pain, he said, while the biggest players such as Enbridge and TC Energy, which was formerly TransCanada, have the most financial cushion and natural gas exposure.

"TC Energy is probably the best positioned in Canada to weather these impacts," Taylor said.

With major, new financial backing from the Alberta government, TC Energy even decided to press ahead with construction of the controversial Keystone XL Pipeline during the pandemic.

But that again reminds the midstream sector of the other challenges it faces from environmentalists, indigenous groups and legal battles. A federal judge in Montana already ruled in April that more environmental assessment is required, and he's now weighing whether to cancel the preliminary construction that's already begun in Montana near the Canadian border crossing.

If a global pandemic doesn't stop you, maybe a legal challenge will instead.

Working US crude stocks growing rapidly (million barrels)