With plenty of assets to reconfigure—and aided by much industry ingenuity—pipeline management is rapidly turning its attention to the pressing issue of “repurposing” oil and gas infrastructure assets to meet the varying needs of a fastchanging energy market. The goal is to find the more profitable uses for under-utilized or stranded assets.
What’s new is the pace and scale—rather than the concept of re-purposing. Of late, repurposing examples appear to be around every infrastructure corner. If a pipeline is not being reversed, it’s being converted to a different product. If a product can’t be piped, it will be railed. Growing output in interior North American regions necessitates new infrastructure to reach markets previously served by imports.
Some assets are already facing second conversions. Memories come back from the late 1990s, when the Pony Express Pipeline, originally designed for crude oil, was converted to natural gas. The pipeline is now owned by Tallgrass Energy Partners, which sees the opportunity to turn full circle and transport burgeoning oil supplies from the Bakken and Niobrara to the Cushing, Oklahoma, hub.
Go West
Similarly, Kinder Morgan’s Freedom Pipeline involves a line originally designed to move crude from the West Coast to McCain, Texas, but was converted to natural gas in 1966, and recently has started an open season under a return to oil service. The project provides for the opening up of Permian basin crude oil supplies to the West Coast, serving as many as 12 major refineries in the San Francisco Bay area and Los Angeles.
The Canadian market
Canadian production, of course, still needs export outlets amid the improving—but still uncertain—outlook for the Keystone XL project. One recently announced joint venture between Enbridge Inc. and Energy Transfer calls for converting to crude oil service certain segments of Trunkline Gas Co. that now transport gas to the Midwest. With a capacity of 420,000 to 660,000 bbl. per day, the Trunkline conversion would help provide western Canadian and Bakken producers with access to eastern Gulf Coast markets by connecting the Patoka, Illinois, hub with the St. James hub in Louisiana.
More recently, TransCanada launched a binding open season for another, larger project to move between 500,000 and 850,000 bbl. per day of crude oil from Alberta and Saskatchewan to delivery points in Montreal and Quebec City, Quebec, and St. John, New Brunswick. Called the Energy East Pipeline, the project has a potential in-service date of late 2017 and would involve conversion to oil service of some 3,000 kilometers of pipeline and construction of significant new pipeline—some estimates are up to 1,400 kilometers— as the line is built out to reach refineries in Montreal, Quebec City and St. John.
Also aimed at helping unlock western Canadian crude is Kinder Morgan’s Cochin reversal project. By reversing the pipeline, Kinder aims at replacing deteriorating regional market demand for propane, due to competing supplies from the Bakken and Marcellus, by tapping into rising Canadian demand for light condensate imports. Demand for condensate, for use as a diluent by Alberta oil sands producers, is projected to grow to 500,000 bbl. per day by 2020. Plans provide for the Cochin pipeline to be in service in mid-2014 with a capacity of 95,000 bbl. per day, carrying condensate to Alberta that is sourced mainly from the Utica and Eagle Ford.
These are just some of the projects being planned by the pipeline sector, whose natural gas business has, in many cases, been significantly impacted by the shale gas revolution and its reconfiguring of gas flows and supplies.
The point-to-point transportation system for gas has historically been driven by market-based differentials between gas hubs. But with shale gas wells flowing, the system has come under economic pressure as differentials have narrowed to historically low levels.
Finding options
“You have a host of companies who may have underutilized systems, and what they are working on now is to repurpose those lines,” Becca Followill, senior managing director at US Capital Advisors LLC, tells Midstream Business. She cites a number of the projects including TransCanada’s Energy East project, Kinder Morgan’s Freedom pipeline and others. “These pipelines have options other than just natural gas,” she adds.
And if pipelines don’t have growth opportunities or assets that are suitable for repurposing on their doorstep?
In a report on gas pipelines last December, Deutsche Bank noted “the topic of risk of stranded assets has risen in importance as the dramatic shift in production to shale basins has occurred. In our view, the magnitude of this risk is relatively low and isolated because the shale plays are generally in areas of historical oil and natural gas production; it is only the magnitude of the risk that has changed.”
Analysts generally cite the emergence of the Marcellus shale as having the biggest impact on gas markets. The Deutsche Bank report, for example, forecasts that “the Marcellus will produce most of the natural gas for the U.S. Northeast and Midwest markets for decades to come.” Such an outlook obviously doesn’t bode well for those who traditionally supplied Northeast and Midwest markets from the Gulf coast and Rocky Mountain supply areas.
“I do worry a bit about some of these pipelines that were built to be long-haul pipelines, and what happens as Marcellus gas displaces them,” says Followill. “However, we will see flow reversal, with gas moving from north to south, rather than south to north, to help balance the market.”
The financial community generally points to the Rockies Express Pipeline as facing headwinds. The Deutsche Bank report cites Rockies Express as one of several pipelines “likely to require restructuring or repurposing in order to have a future.” Rockies Express is among those at greatest risk, agrees Followill, although she notes that this is well known to financial markets.
Credit-rating impact
Early last year, Standard & Poor’s (S&P) analysts lowered its rating on Rockies Express to BB, taking it below investment grade, from BBB- previously, citing its “somewhat aggressive financial measures.”
In a June 2012 report, entitled “The Shale Gas Boom Is Shaping U.S. Gas Pipelines’ New Reality,” authors Nora Pickens and David Lundberg point to the risk of Rocky Express’ contracts covering firm transportation not being renewed. The bulk of the contracts expire in 2019, although 10% expire as soon as 2014, notes S&P.
“The contracting risk could result in substantially lower cash flows when the vast majority of existing contracts expire in 2019,” said Pickens and Lundberg. In terms of the industry outlook, they wrote, “Simply, there are limited opportunities to profit from once volatile and wide geographic price spreads.”
Followill sees the issue of contract expiration as being more company rather than industry specific. “There are pipelines that have issues,” she says. “But it’s not like it is an industry-wide problem in need of an immediate solution. Companies are working through it.”
As with other industries, prospects of contract renewal often depend on location, notes Followill. In addition, contracts tend to be staggered and often involve a variety of customer relationships, including some that are utility subsidiaries. Also, “remember that as these contracts expire, we are going to have a lot of coal plants being retired through gas generation being built. Just because it expires doesn’t mean that there’s not someone else who picks up the capacity.”