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Potential steel shortfall looms amid Permian Basin pipe bottleneck

Pipeline companies could face a steel supply shortage even as demand for additional oil and gas transportation capacity from booming shale plays ramps up to crisis level.

With Permian Basin production outpacing the construction of sufficient crude oil and natural gas takeaway capacity, and a looming crunch at the Cushing, Okla., hub that could widen the price differential between West Texas Intermediate and Brent crude, midstream developers are scrambling to catch up. More new and expanded pipeline projects have been announced, but recently imposed U.S. quotas on the foreign steel products that the oil and gas industry depends on might jeopardize that crucial capacity.

"The large-diameter, thick-walled steel used to construct natural gas transmission pipelines is a niche product with unique technical specifications," Interstate Natural Gas Association of America CEO Don Santa said in a May 31 statement. "Pipelines require specialty steel products not always available in sufficient quantities and specifications from domestic manufacturers. For certain steel products used in pipelines, no domestic product is available today."

According to a May 2017 ICF International study commissioned by the Interstate Natural Gas Association of America and the American Petroleum Institute, restrictions on imports of steel for line pipe, fittings and valves would delay or stall most pipeline projects. Those risks could now materialize after President Donald Trump removed tariff exemptions May 31 on products from Mexico, Canada and the European Union. Canada, Germany, Italy and Greece are some of the American pipeline industry's biggest suppliers.

Plains All American Pipeline LP CEO Greg Armstrong did not hide his frustration with the trade policy during a June 4 speech in Washington, D.C., calling the tariffs "unjust" and "intolerable."

"A lot of the steel pipe we're buying right now is not in the U.S.," he said.

One of the pipeline projects Permian oil drillers are depending on to alleviate the West Texas bottleneck is Plains' 585,000 barrel-per-day Cactus II pipeline, which is not expected to begin commercial service until the third quarter of 2019.

Kinder Morgan Inc., meanwhile, said it has filed an exclusion request for some of the imported steel pipe needed for its 2-Bcf/d Gulf Coast Express pipeline project that should ease natural gas transportation congestion in the Permian when it comes online in the fourth quarter of 2019.

"We asked that the Department of Commerce grant the request on grounds that: (1) our specialized pipe imports do not threaten U.S. national security, (2) the required quantity of pipe meeting KMI's standards was unavailable from domestic sources on the schedule required by the project, and (3) the pipe was procured via a contract predating the presidential proclamation announcing the tariffs," Kinder Morgan spokeswoman Melissa Ruiz wrote in a June 4 email.

Williams Cos. Inc. spokesperson Christopher Stockton, however, said in an email that the pipeline giant does not expect the steel tariffs to have a "significant negative impact" on its project backlog.

Even though the Trump administration's policy is meant to protect domestic industries on national security grounds, pipeline industry companies and organizations lobbied the federal government for exemptions from the steel tariff and quotas in due to "zero domestic availability" for certain pipeline steel products.