Turbulent times for the midstream sector – Crude price effect – August 2015 Overview
As the price of crude oil continues to remain under $50 per barrel, supply, demand and price forecasts are being significantly revised and this, in turn, will continue to shape the investments being made in crude oil infrastructure throughout North America.
In its Short-Term Energy Outlook (STEO), the EIA estimates that month over month U.S production volumes will decline by 140,000 bpd in August. Furthermore, U.S. crude oil production is projected to continue its downward trend till mid-2016: the Administration forecasts 9.2 million bpd and 8.8 million bpd of production for 2015 and 2016 respectively. The EIA also predicts West Texas Intermediate (WTI) will average $49 per barrel in 2015 and $54 in 2016. Amid this bleaker outlook for the medium-term horizon, it comes as no surprise that Moody’s downgraded its outlook for the global midstream industry in August, contending that most of the needed infrastructure has already been built. In fact, the U.S. Federal Energy Regulatory Commission (FERC) reported that 14 pipeline projects have started operations from January to July 2015, nearly double that for the same time period last year. While the effects of lower oil prices have been widely publicized for the upstream sector—the oil and gas rig count has remained around the low level of 850—the ripple effect will inevitably impact the midstream sector as well (the exception being the Marcellus and Utica Shale Basins which still require much more infrastructure). Beyond this, analysts expect significantly more M&A activity in the oil and gas industry as companies continue to cut costs and operate under high budgetary pressure.
This summer, regulatory holdups continue to delay other infrastructure projects already underway. Kinder Morgan’s Palmetto Pipeline received a denial for its application for a Certificate of Public Convenience from the Georgia Department of Transportation. Various other projects continue to fight an uphill regulatory battle (Keystone XL, Energy East, Trans Mountain Expansion, etc.).
With regard to regulations, the Congressional Research Service (CRS) recently published the Presidential Permit Review for Cross-Border Pipelines and Electric Transmission report. The report points to Congress’ multiple attempts to modify this lengthy process. It remains unclear whether changes in legislation targeting federal siting of cross-border pipeline and electric transmission projects would speed up the timing of future decisions. The core of this issue is that all cross-border projects are subject to the same National Environmental Policy Act (NEPA) requirements. Along these lines, the CRS asserts that, after the NEPA review is complete, the most efficient solution is to impose decision-making deadlines on the permitting agencies and, in this way, hopefully provide greater certainty with respect to the approval timeline.
Where are the trains going?
As more pipelines projects are coming on-stream, the CBR sector is losing market share. The best place to study this effect is in the Bakken. Justin Kringstad, director of the North Dakota Pipeline Authority, said that as more pipelines come into operation in the region, such as Kinder Morgan’s Double H Pipeline, smaller volumes are being be transported by rail. Historically, rail has been the main transportation option for takeaway of Bakken crude – until now.
Narrowing crude price differentials are another factor affecting CBR; in some cases, making it an uneconomic mode of transportation to reach certain destinations. For example, refiners PBF Energy and Phillips 66 have said that they have been using more economical waterborne deliveries in lieu of using their trains. East Coast refiners have been bringing in increasing volumes of imported crude as a result of the narrowed WTI vs. Brent differential. Also Irving Oil is changing crude supplies for its Saint John refinery (New Brunswick). The refinery has gone from importing 100,000 bpd of Bakken crude via rail to bringing in no Bakken crude-by-rail. Irving reported that 90% of the crude oil it currently buys is from Saudi Arabia, western Africa, and western Canada (by rail).
Rail Safety Developments
The Fraser Institute published its study “Safety in the Transportation of Oil and Gas: Pipelines or Rail?” The study indicated that the transportation of oil and gas via either pipeline or rail is actually safe taking into consideration the amount of crude they transport. Nevertheless, in comparing the two options, pipelines are a safer mode of transportation; crude transported by rail is 4.5 times more likely to experience an “occurrence” as compared to transportation via pipeline.
Recently, the CBR industry has taken steps to reduce the chances of accidents occurring. The National Transportation Safety Board (NTSB) released a train braking simulation study that shows that electronically controlled pneumatic (ECP) brake systems out-performed distributed power configurations. Also, distributed power configurations have out-performed conventional brake systems. The study provides detailed descriptions and analyses of each braking system and the stopping distances each achieved under various circumstances. The study was peer-reviewed by technical representatives from the Federal Railroad Administration, BNSF, TrinityRail, Standard Steel, Brotherhood of Locomotive Engineers and Trainmen, and Sharma & Associates Inc.
Lastly, the Federal Railroad Administration (FRA) and Transport Canada finalized new rules for securing trains in an effort to prevent rail disasters. Both agencies announced a series of procedures and safety measures to work with unattended trains that carry crude oil or ethanol, or poisonous, toxic, or highly flammable materials. Now, two railroad employees will be responsible for securing an unattended train.
Crude oil exports
As industry waits to see if Congress will reach a decision this Fall about lifting the 40 year crude export ban, analysts are starting to look closely at the infrastructure in place to see if it would be suitable to support crude exports – if they were to be approved soon. Ed Morse, global head of commodity research at Citigroup, said that taking into account the 500,000 bpd that US currently exports to Canada, there is enough infrastructure to export an extra 500,000 bpd immediately but issues would likely arise if producers attempt to export more than this volume. Morse estimates that it could take between 6 to 18 months to build out the export capacity needed to export 1 million bpd of crude.
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