Plains All American Pipeline LP executives said the pipeline partnership is working hard to get around crude oil transportation bottlenecks in West Texas and western Canada, but it remains unclear whether aboveground alternatives can completely fill the gap.
With Permian Basin production rapidly outpacing available takeaway capacity, drillers are depending on midstream operators to build more pipelines. That sooner-than-expected drilling boom, however, comes at a time when pipeline companies are only just starting to get comfortable with adding multibillion-dollar growth projects to their balance sheets after a commodity price downturn hit the sector hard in 2015.
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The resulting pipeline shortfall is expected to last until the third quarter of 2019, when projects like Plains' 585,000-barrel-per-day Cactus II pipeline begin commercial service. In the interim, producers and shippers are turning to crude-by-rail and trucking. Plains Senior Vice President Jeremy Goebel said refiners also will have to come to terms with the prospect that not all 650,000 bbl/d of Permian production growth between the end of 2018 and the end of 2019 will leave the area.
"This is not going to all come to market," Goebel said during Plains' June 5 analyst and investor conference. "You're going to probably need to slow down activity because ... the Permian Basin is not set up like the [Williston Basin] to pipe in the rail facilities and move unit trains out."
Goebel noted that Plains has added 150,000 bbl/d of rail and trucking capacity.
The master limited partnership faces a similar puzzle in western Canada, where a crude pipeline capacity shortage is expected to peak in 2019-2020.
"In each of those years ... we estimate about 300,000 barrels a day [will be] required to move by other solutions other than what's currently available by pipe," Plains Director Luc Mageau said during the conference. The most Plains has ever moved on rail is about 180,000 bbl/d, he said, "So the question obviously becomes ... will crude by rail really be able to make up the window?"
CEO Greg Armstrong, meanwhile, reiterated his frustration with U.S. trade policy in light of President Donald Trump's May 31 decision to remove tariff exemptions on products from Mexico, Canada and the European Union and impose quotas on foreign steel products.
"If they impose a limitation on the steel order that we had, and only 80% of it is able to be brought into the U.S., if you think about it, 80% of a pipeline really doesn't do us any good," he said. "It's kind of like only 80% of a bridge. It's kind of pretty to look at, but you can't get across it."
Armstrong noted that Plains could "tolerate" the tariffs if the U.S. Department of Commerce exempts the company from them, but that the quotas would be "unworkable."
The CEO also talked about the joint venture trend that enables pipeline companies to invest in expensive projects without over-leveraging. "I think we'd all rather build everything 100% ourselves," Armstrong said, but it is difficult to turn down someone willing to underwrite a project and share the risk.
"That can take a couple-billion-dollar project [and] turn it into a bite-sized project with a very attractive rate of return," he said.
Western Gas Partners LP recently acquired an interest of up to 15% in Plains' Cactus II pipeline. In 2017, Plains and CVR Refining LP formed a 50/50 joint venture to own a 100-mile pipeline system connecting the oil hub of Cushing, Okla., to a CVR-owned refinery in Kansas.

