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US pipeline builders brace for higher costs after Plains loses steel tariff case

Washington — US oil and natural gas pipeline builders are bracing for higher costs and potential delays after Plains All American lost its bid for an exemption from US steel tariffs for its 585,000 b/d Cactus II crude pipeline.

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Cactus II is one of three major oil pipelines starting up in the second half of 2019 that are expected to relieve a botteneck currently holding back Permian production and depressing Midland wellhead prices. It was the first major energy project to receive a ruling since the 25% steel and aluminum tariffs took effect.

Plains said the $1.1 billion project would "move forward as planned," but did not say whether the decision altered the Q3 2019 in-service target.

The Commerce Department's Bureau of Industry and Security recommended denying Plains' request for relief from the 25% steel tariff after determining that 26-inch steel pipe needed for the project is produced in the US "in a sufficient and reasonably available amount and of a satisfactory quality." Matthew Borman, deputy assistant secretary of export administration, denied the exclusion request July 13, according to a document made public Monday.

In March, Commerce said companies would be allowed to seek exemptions if the steel or aluminum products are found not to be made in the US in satisfactory quality or "in a sufficient and reasonably available amount."

Plains said it was unfair to enact tariffs on steel orders placed months earlier. It bought steel pipe from a Greek mill in late 2017, and tariffs were announced in March.

"Collecting a tariff on steel pipe orders for projects like this constitutes a tax on the construction of critical US energy infrastructure, which is a significant unintended consequence of current trade policy and risks US energy security and American jobs," a Plains spokesman said in a statement. "We are reviewing our options to challenge this decision."

Plains had argued that while some US mills make 26-inch pipe, none use the "high-frequency welded" manufacturing technique the company requires.

A coalition of US steelmakers had objected to Plains' exclusion request by arguing that US mills can produce 26-inch pipe that is interchangeable with high-frequency welded pipes. They pointed to US mills that use the "submerged arc welded" process to make 26-inch pipe.

"We understand that Plains did source a portion of this project from a US producer," the American Line Pipe Producers Association said in a letter to Commerce Secretary Wilbur Ross in May. "Its decision not to do so for the entire project was based purely on the unfair traded prices of Greek imports, and Plains should not now receive an exemption for these products."

Cactus II is the first major long-haul pipeline from the Permian Basin to Corpus Christi on the Texas Gulf Coast and has received full shipper commitment. The 515-mile system will have origination points at Orla, Wink, Midland, Crane and McCamey ? all major crude producing areas in the Permian ? and offer crude segregation facilities. It will have an option to expand to 670,000 b/d.

Jenna Delaney, senior analyst for S&P Global Platts Analytics, said the WTI Midland differential to WTI at Cushing is expected to be wide and volatile until at least one of the large newbuild pipelines starts up.

Any delays to new pipeline construction will continue to put downward pressure on WTI crude in Midland. Price differentials for crude closest to wells producing in the Permian Basin have sunk to record lows this year as production is outpacing takeaway capacity.

Last week WTI Midland crude in the Permian traded at its lowest level in about four years, with trades for August barrels heard done at a $16/b discount to the underlying WTI cash basis. WTI Midland has not been assessed lower since June 2014. The 30-day moving average for WTI crude in Midland is WTI cash minus $10.18/b.

On Tuesday morning, WTI Midland was widening again after strengthening late last week. The crude was heard trading Tuesday at WTI minus $13.50/b, which was $2/b lower than where it was assessed the day before.

Permian growth depends on pipeline infrastructure keeping pace, said Aaron Padilla, an American Petroleum Institute senior adviser for international policy.

"While we wouldn't speculate on how long the infrastructure bottleneck will last, these trade policies could impact investments and limit availability of materials needed to increase pipeline capacity in the area," he said.

Padilla added that the steel tariffs could jeopardize US leadership as the world's top natural gas producer and second crude oil producer.

Joshua Zive, a trade attorney with the law firm Bracewell, said the Plains decision "reaffirms what we've known all along, which is that it was going to be very difficult to secure exclusions." It is far easier to object to an exclusion request than to disprove those claims to an overburdened Commerce Department, he said.

Industry sources have suggested that in most cases in which domestic steel producers have filed objections so far, Commerce has been denying the exclusions.

An exclusion requested by Welspun Tubular for pipe that would to be used to build a portion of the 301-mile, 2 Bcf/d Mountain Valley natural gas pipeline project faces an objection from Berg Steel Pipe. Welspun had argued that specialty lengths of 42-inch pipe was needed for mountainous terrain. Commerce has yet to decide on that request.

The Plains decision "sends a clear signal to users of these metals that the relief we need is foundational relief from these tariffs, not just dribs and drabs" in exclusions, Zive said.

The Interstate Natural Gas Association of America said tariffs should not be a factor in determining what specific type of pipe is appropriate for a specific pipeline project.

"We are troubled that the Section 232 tariffs have now put Commerce in the position to decide whether completely different line pipe products offer equivalent safety, engineering and constructability properties," INGAA spokeswoman Cathy Landry said.

Plains CEO Greg Armstrong called steel tariffs unjust during the Energy Information Administration's annual conference in Washington, DC, in June.

"A lot of the steel pipe that we're buying right now is not made in the US, the size and specification," he said. "So we don't think we should pay a tariff on something you can't buy in the US."

-- Meghan Gordon and Maya Weber, with Ashok Dutta and Laura Huchzermeyer in Houston, newsdesk@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com