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US oil midstream sector enters hibernation as pandemic wreaks industry toll

Highlights

Only 25% of pipeline miles planned for 2020 start completed

Most projects delayed or deferred to 2021 or beyond

EPIC crude pipeline the only major project built this year

Houston — The US midstream oil sector is headed deep into a period of hibernation, with pipeline projects delayed or put on hold indefinitely as the coronavirus pandemic continues to dampen global demand and North American production.

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Apart from a small handful of pipelines already well underway this year, virtually every other project has been postponed to 2021 or beyond as the industry cuts capital spending and dividend payouts and focuses on preserving cash flow, said Sandy Fielden, director of oil research at Morningstar.

Last year and 2020 were intended to be record years for crude pipeline build-outs, Fielden said in a new report "Crude pipeline developers hit the brakes," but that quickly began changing in March as the pandemic took hold. While there have been few announcements because companies don't want to formally highlight cancellations and delays, it's clear project timelines have moved back quite a bit and some will be quietly canceled, Fielden added.

US Energy Information Administration data shows only about 25% of pipeline capacity miles planned to start in 2020 have been completed, consisting primarily of the 600,000 b/d EPIC rude pipeline from the Permian Basin to Corpus Christi, Texas, that was finished in February, as well as a few smaller projects in the Rockies.

A nation overbuilt

The US, especially in the still-active Permian Basin, has abruptly transitioned from an industry in desperate need of long-haul capacity less than two years ago to a nation with overbuilt energy infrastructure.

S&P Global Platts Analytics expects US crude and condensate production to average 11.75 million b/d in 2020, then drop to 10.26 million b/d in 2021 and rebound slightly to 10.41 million b/d in 2022.

This scenario was expected to arrive by the mid-2020s but has been hastened because of the pandemic, said Colton Bean, a midstream analyst with Tudor, Pickering, Holt & Co.

"We're certainly over-piped," Bean said. "The large, backbone infrastructure has been built out in the US. We just don't have that need for long-haul infrastructure."

A small handful of projects are still moving forward this year, such as Enterprise Products Partners' Midland-to-ECHO III crude pipeline in Houston, but only because the contracts and dollars were in place and the project was well underway. Most other pipeline projects have pushed back deeper into 2021 or delayed indefinitely, including the Midland-to-ECHO IV pipeline now slated for completion in late 2021 at the earliest.

Other projects—such as the Plains All American's and MPLX's Capline Pipeline reversal, Energy Transfer's Dakota Access Pipeline expansion, and Phillips 66's Liberty, Red Oak and ACE pipelines—are all seeing construction pushed back beyond this year, if not longer.

As production falls in the Bakken Shale and other regions, Bean questions the need for most pipeline projects that originate north of the Cushing, Oklahoma, storage hub.

"I wouldn't be surprised if none of those came back around," he said.

Simply put, the big waves of crude midstream growth from the shale boom are now mostly over.

"It's a less exciting industry," Bean said. "You're not going to see a lot of large splashy projects. You'll mostly need incremental processing plants and wellhead connects. We really don't have any glaring holes in the US pipeline infrastructure for the next few years out.

"It's going to be largely gathering and processing centric."

Keeping it simple

But boring isn't all bad. Midstream firms focusing more on cash flow and debt reduction, rather than all-out growth, can be better for the industry's long-term health, Bean added.

"We're going to see a pretty dramatic drop off in midstream capital spending, but it's maybe better than death by a thousand cuts," he said.

Ethan Bellamy, a midstream analyst with Robert W. Baird & Co., sees that trend, too, even if companies aren't readily publicizing the changes.

"Midstream has cut discretionary spending to the bone," Bellamy said. "With the exception of seasonal [natural gas] needs in the US Northeast, most regions are oversupplied until US production stops falling, which current commodity prices suggest won't be until mid-2021."

There's also the ongoing industry concern that more federal lands, including in the Permian's New Mexico portions, could be cut off to crude drilling if presumptive Democratic presidential nominee Joe Biden defeats President Donald Trump in November, further deflating the need for pipeline projects.

And it's not just US shale pipelines. The race to build a series of deepwater oil-exporting terminals offshore Texas in the Gulf of Mexico has slowed to a crawl, if not canceled altogether. The only two projects analysts still consider particularly viable, Enterprise's SPOT project and Phillips 66's Bluewater terminal, are delayed to at least 2021.

And pipeline projects from Canada to the US, including the Keystone XL project and Enbridge's Line 3 and Line 5 pipelines, continue to face delays from regulatory and legal issues only compounded by the pandemic's impacts.

"The number of projects is just pretty slim at this point," Bean said. "There aren't many crude volumes that are up for grabs right now."

US crude pipeline sector grinds to a halt amid coronavirus pandemic
Pipeline project
Operator
Crude capacity added (b/d)
Source-destination
Status
EPIC Crude Pipeline
EPIC Midstream
600,000
Permian-Corpus Christi
Completed in late February
Pony Express expansion
Tallgrass Energy
70,000
Wyoming-Colorado
Scaled back, potentially delayed
Midland-to-ECHO III
Enterprise Producers Partners
450,000
Permian-Houston
Under construction
Midland-to-ECHO IV
Enterprise Producers Partners
450,000
Permian-Eagle Ford-Houston
Delayed at least to late 2021
Capline reversal
MPLX
1.2 million
Illinois-Louisiana
Delayed to 2022
Swordfish Pipeline
MPLX
600,000
St. James-Clovelly (Louisiana)
Delayed
Jupiter Pipeline
Jupiter Energy Group
1.1 million
Permian-Brownsville
On hold indefinitely
Red River expansion
Plains All American Pipeline
65,000
Cushing-Longview, Texas
Delayed
Dakota Access expansion
Energy Transfer
At least 180,000
North Dakota-Illinois
Scaled back, delayed
Ted Collins Link
Energy Transfer
275,000
Houston-Nederland
Scaled back, delayed
Voyager Pipeline
Magellan Midstream
300,000
Cushing-Houston
On hold, redesigned
Liberty Pipeline
Phillips 66
350,000
Wyoming-Cushing
Deferred to at least 2021
Red Oak Pipeline
Phillips 66
400,000
Cushing-Texas Gulf Coast
Deferred to at least 2021
ACE Pipeline
Phillips 66
400,000
St. James-St. Bernard (Louisiana)
On hold indefinitely
Wink-to-Webster Pipeline
ExxonMobil
1 million
Permian-Houston
Delayed to 2021
Keystone XL
TC Energy
700,000
Alberta-Nebraska
Delayed to 2023
Line 3 replacement
Enbridge
370,000
Alberta-Wisconsin
Delayed
Source: Companies, S&P Global Platts Analytics