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Trump's Turkey tariff hike expected to hit Kinder Morgan gas pipeline project

President Donald Trump's plan to double tariffs on steel imported from Turkey to 50% could place additional financial pressure on Kinder Morgan Inc.'s proposed 1.98-Bcf/d Gulf Coast Express Pipeline LLC and dampen prospects for future U.S. natural gas projects.

The escalating trade headwinds for domestic pipeline operators come at a time when transportation constraints in the prolific Permian Basin shale play have increased demand for new takeaway capacity to deliver supplies to market for use in exports and to serve power-hungry Mexico.

The Houston-based Kinder Morgan, which moves more than a third of the gas consumed in the U.S., is sourcing 144,000 tonnes of steel pipe from Turkish producer Borusan Mannesmann to be used for Gulf Coast Express. Welspun Tubular is set to produce about 175,000 tonnes for the pipeline at its Little Rock, Ark., mill.

"We continue to be concerned that these sorts of trade actions threaten important energy infrastructure projects, and ultimately hurt American consumers and businesses," the Interstate Natural Gas Association of America said in a statement.

The trade group said "companies that made purchasing agreements months or years ago, before the announcement of Section 232 tariffs, are now being unfairly punished for participating in international trade."

Kinder Morgan spokeswoman Sara Hughes declined to say whether Trump's latest decision involving tariffs on steel imports from Turkey would delay or imperil Gulf Coast Express. She noted that the company has a pending request to the U.S. Department of Commerce for an exclusion from Trump's previous 25% tariffs on steel imports from Turkey. Kinder Morgan's partners on Gulf Coast Express, DCP Midstream LP and Targa Resources Corp., did not respond to requests for comment.

Gulf Coast Express is first in line among a handful of pipeline expansions designed to alleviate Permian transportation constraints.

In February, Kinder Morgan launched an open season for the remaining capacity on Gulf Coast Express, which it said it was upsizing because of increased market demand. The $1.75 billion project, for which a positive final investment decision has already been made, is scheduled to start up in October 2019.

A second Kinder Morgan project targeting the same supply region, Permian Highway, is expected to cost $2 billion and designed to transport up to 2 Bcf/d of gas through 430 miles of 42-inch-diameter pipeline from Waha, Texas, to U.S. Gulf Coast and Mexico markets. That project is expected to be in service in late 2020.

Hughes would not say whether Kinder Morgan is interested in sourcing some of the steel for Permian Highway from Turkey or how doing so would impact the project's viability. She noted that a final investment decision on the line has not yet been made. A Borusan Mannesmann official did not respond to an email seeking comment.

Section 232 of U.S. trade law gives Trump the right to impose tariffs when imports threaten national security. Initial global tariffs of 25% on steel and 10% on aluminum went into effect March 23, although the implementation for some countries was delayed until June 1 and a handful of countries made quota deals with the U.S. to avoid the tariffs.

Trump cited the devaluation of the Turkish lira in his Friday decision to double the steel tariffs for imports from Turkey, which recently passed legislation to facilitate steel exports. The White House said documents will be prepared to boost tariffs in line with Trump's decision, which he announced on Twitter.

Global concerns

Elsewhere, Trump's trade war with allies and adversaries alike is affecting U.S. pipeline projects.

Cheniere Energy Inc. has requested a tariff exclusion for its Midship pipeline project. The pipeline is set to stretch from the Anadarko Basin in Oklahoma to pipelines that will allow up to 1.44 Bcf/d to be sent to the U.S. Gulf Coast. It is sourcing pipe for that project from a Canadian supplier.

The U.S. Department of Commerce rejected a similar exclusion request by Plains All American Pipeline LP for more than 155,000 tonnes of steel for its Cactus II crude pipeline. The operator is sourcing steel for its pipeline from a Greek manufacturer.

Other costs

Even if Kinder Morgan and Cheniere are granted product exclusions for their steel needs, they could still face a rise in steel-related production costs. Much of the imported steel used for pipeline projects is also under anti-dumping and countervailing-duty investigations by the U.S.

Whether and to what extent U.S. pipeline operators can pass the extra costs from tariffs to their customers through rate adjustments remains unclear. Kinder Morgan CEO Steve Kean was asked that question during a July 18 conference call with investors. "It is a competitive market, though, and so there is some limit on the ability to try to negotiate a pass-through arrangement with shippers," Kean said.

Harry Weber is a reporter for S&P Global Platts, which like S&P Global Market Intelligence is owned by S&P Global Inc. Michael Fitzgerald contributed to this article.