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Enterprise Products Partners cancels Permian to USGC crude pipeline

Highlights

EPD cancels M2E4 pipeline, shifts volumes to other pipes

Permian pipeline projects could further be trimmed back

New York — Enterprise Products Partners on Sept. 9 said it would cancel its 450,000 b/d Midland-to-ECHO 4 pipeline project, offering customers who had reserved space on the line amended agreements to use its other three Midland-to-ECHO pipelines in exchange for extending the term of their agreements.

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The fall-off in oil production in the Permian Basin has cut back the need to build all the pipelines planned prior to the coronavirus pandemic, which, in turn, has cut demand for crude and refined products across the globe.

Enterprise Product Partners' decision to not go ahead with the pipeline is seen as a positive for the industry as it looks to navigate changing market dynamics resulting from the pandemic.

"It's important...that you are responsive to your customers. And I think this announcement reflects us being responsive to our customers and what their needs are," said Energy Products Partners' co-CEO Jim Teague speaking at Barclays CEO Energy–Power Virtual Conference on Sept. 9 about the company's decision to cancel the pipeline known as the M2E4.

Teague said he thinks his company has "done some right with these guys" and that the decision is good for both parties long-term.

Surplus capacity

"With all of the pipeline capacity that's come online over the past year, plus the Wink to Webster project in 2021, combined with declining production in the near term... the Permian will have surplus pipeline space for many years, even without M2E4," said Jenna Delaney, analyst with S&P Global Platts Analytics.

Market sources said the cancellation of Midland-to-ECHO 4 was not surprising and could be a sign that other projects could be cancelled or delayed as the uncertainty surrounding demand for oil and oil products resulting from coronavirus pandemic appears to have no end in sight.

""I think there's a lot more bleeding to follow with companies," said one crude oil trader.

EPD will be able to shift ECHO 4 contracted volumes onto its other three Midland-to-ECHO pipelines which has a combined capacity of 1.27 million b/d. The ECHO 3 pipeline, part of the Wink to Webster line, is still on track to come online in the third quarter of 2020.

"I don't know what the commitment levels were on their other pipelines, but if they were able to shift the commitments from this one on to existing assets and keep those lines more full than otherwise would have been the case, that's a win for them," said Delaney.

Crude exports stay strong, production inches up

US crude oil exports, while off February's high of 3.708 million b/d, have been surprisingly strong, averaging 2.753 million b/d in June, according to Energy Information Administration data.

EIA data shows that for the last four weeks ending in Aug. 28, crude exports have ticked up to average 2.911 million b/d, the majority of that light, sweet crude from the Permian and Eagle Ford Basins.

"We have seen a higher appetite for the light," said EPD's Teague on the call.

This demand has narrowed the price spread between crude in the Permian oil hub of Midland, Texas, and USGC export facilities and refineries and more favorable pipeline transport terms could help mitigate this impact on producers.

Permian production is also inching up, averaging 4.154 million b/d in September, up from the 4.147 million b/d in August, EIA data shows.

USGC refiners – many of whom are running in maximum light, sweet crude mode -- have been cautious in ramping up crude runs, in an effort match output with demand to support weakening refining margins.

USGC WTI cracking margins averaged $5.14 for the week ended Sept. 4 compared with the $5.71/b the week earlier, Platts Analytics margin data showed.

For the four weeks ended Aug. 28, EIA data showed US Gulf Coast refiners ran at 80.1% of capacity, below last year's average of 96.1%, as 2.3 million b/d of capacity shut ahead of Hurricane Laura. Crude inputs for the period were just over 7,000 b/d.