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Red Oak project will not exacerbate Permian pipeline overbuild, Plains execs say

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Red Oak project will not exacerbate Permian pipeline overbuild, Plains execs say

Plains All American Pipeline LP is betting on increasing traffic through Cushing, Okla., to support the company's planned $2.5 billion pipeline project with Phillips 66 that would carry volumes from the crude oil hub and the Permian Basin to the Gulf Coast.

"You can see that [Wichita Falls, Texas] will attract more barrels" from high-production areas like the Mid-Continent, Plains CEO and Director Wilfred Chiang said during the midstream company's June 11 conference with investors and analyst. "The industry is going to need an outlet to Cushing for a significant period of time. If the Gulf Coast gets congested because we put too many barrels there, the outlet is going to be Cushing."

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As part of the 50/50 joint venture, called Red Oak Pipeline LLC, Plains and Phillips 66 would lease capacity in Plains' Sunrise pipeline system, which extends from Midland to Wichita Falls. The venture would build a new 30-inch pipeline from Cushing to Wichita Falls and Sealy, Texas. A new 30-inch pipeline segment from Sealy to Corpus Christi and Ingleside and a 20-inch pipeline segment to Houston and Beaumont would also be constructed, with service from Cushing to the Gulf Coast expected to begin in the first quarter of 2021.

With Plains and other Permian-focused midstream firms wary of a potential crude pipeline overbuild out of West Texas and New Mexico even amid some consolidation, Plains Executive Vice President Jeremy Goebel said Red Oak is a play to optimize existing assets without exacerbating an infrastructure overbuild.

"We wanted to make sure there wasn't another project potentially built that wasn't necessary," he said.

Plains and Phillips 66 could add another partner to the project, according to Chiang, who added that "history would tell you that we'll be opportunistic" if the right fit materializes.

Midstream analysts at Mizuho Securities USA LLC said the project's price tag is worth it because Plains' "optionality to move barrels between supply and demand market hubs remains a competitive advantage that is difficult to rival." The resulting capital spending increase may disturb some investors, they wrote in a June 12 note to clients, but "the bottom line remains good projects equate to good projects and this one qualifies."

In addition to Red Oak, Plains is involved in the Wink-to-Webster crude pipeline from the Permian to the Gulf Coast that also includes Exxon Mobil Corp., Lotus Midstream LLC and potentially MPLX LP, as well as the reversal of its Capline system for crude deliveries from Illinois to Louisiana or Mississippi under development with another Marathon Petroleum Corp. unit and BP Oil Pipeline Co. At the end of May, Plains announced a joint venture with Delek Logistics Partners LP to expand its Red River oil pipeline system, which runs from Cushing to Longview, Texas.

"What we saw was a trend beginning in that 2013 time period that in midstream the lines became grey: producers, refiners started to get into the midstream value chain. You can either compete with them or side with that capital … and you can make them part of the project," Goebel said about Plains' approach to partnering with other companies across the midstream sector. "We do a good deal and the next deal comes to you because they want to find another way to work with us."

Another trend that Plains has noticed is banks' and shareholders' increasing attention to environmental, social and governance concerns, but Vice President Roy Lamoreaux urged conference attendees to look beyond the low scores that Plains has received from ESG advocacy organizations.

"If you look at our ESG scores at some of the agencies that rate companies … you see that we don't rate very well, and yet when we meet with banks and investors, we've actually had them tell us that we're kind of in the top quartile," he said.

The CDP, a nonprofit formerly known as the Carbon Disclosure Project that provides a global environmental disclosure system for investors for data, gave Plains a grade of F in its 2018 report of U.S. corporate scores after the company did not respond to the organization's request for data.