Midstream Projects and Construction: Live to Build Another Day

[Editor's note: A version of this story appears in the December 2020 edition of Midstream Business. Subscribe to the magazine here.]   

In 1918, during the Spanish Flu pandemic, U.S. oil production averaged just under 49,000 bbl/d. When combined with output of about 9,500 bbl/d from Mexican producers, North America accounted for about 70% of the world’s production.

While that market share has fallen off a bit since then, keep the U.S. oil and gas industry’s status in perspective—one pipeline project that was canceled in September would have moved nine times the entire U.S. production of crude oil from a century ago. Not only was the cancellation not a cataclysmic event, but the company was applauded by analysts for its prudence.

That said, it has been a rough year. Sometimes a sector just needs to get through a rough patch and live to build another day.

Gulf Coast

For all the uncertainty 2020 has thrown at the world, two long-term fossil fuel trends remain: Coal continues to fade, and natural gas continues to replace it in power generation and overall prominence.

For those reasons, the hesitation in pushing forward with two major Gulf Coast LNG projects is not especially worrisome, especially in combination with a third plant reaching full commercial operations.

In early October, the U.S. Federal Energy Regulatory Commission (FERC) approved the request of a unit of Glenfarne Group LLC that allows it five more years to complete the Magnolia LNG export plant in Lake Charles, La.

FERC had already given the green light for Magnolia and related pipeline expansions in April 2016 with a requirement that the project be completed in five years. Glenfarne acquired Magnolia from New South Wales, Australia-based LNG Ltd. in May 2020.

The company’s delay request to FERC cited “unforeseeable developments in the global LNG market,” including lockdowns from the pandemic and the U.S.-China trade war, that hindered Magnolia’s ability to land the long-term LNG offtake contracts that would allow it to secure project financing and reach a final investment decision (FID).

Glenfarne expects to decide in late 2021 whether to proceed with Magnolia and a Texas LNG facility. If it moves ahead, the plants could enter service in 2025.

NextDecade Corp. expects to make an FID in 2021 on whether to build at least two trains at its proposed Rio Grande LNG plant in Brownsville, Texas. The company is also looking into ways, including carbon capture and storage, to reduce emissions and even achieve carbon neutrality at the plant.

Rio Grande already has secured a 20-year agreement to supply 2 million tonnes per annum (mtpa) of LNG to a unit of Royal Dutch Shell Plc. Each of the plant’s trains will have a capacity of 5.87 mtpa.

Sempra LNG, on the other hand, is well past FID angst over its Cameron LNG export terminal in Hackberry, La. So far past, in fact, that it announced in August that the facility had begun full commercial operations.

“At Sempra LNG, we set a goal of building the leading LNG export business in North America,” Justin Bird, CEO of Sempra LNG, said at the time. “With Cameron LNG moving to full commercial operations, we are one step closer to that goal. We look forward to continuing to work with customers and partners around the world to achieve their energy transition goals.”

Cameron LNG is expected to generate nearly $12 billion of after-debt service cash flows for Sempra Energy over 20 years.

But Sempra wasn’t alone in seeing construction end and operations begin. EPIC Y-Grade LP said in August that its Robstown, Texas, fractionator had entered service. The greenfield project boasts a capacity of 110,000 bbl/d, lifting EPIC’s total Texas Gulf Coast capacity to 220,000 bbl/d.

Permian Basin

A major pipeline was completed, another went into service and a third pipe was canceled from August through October. In some years, that type of recap for the Permian would warrant a shrug or even a concerned frown. In 2020 it’s a fist bump for the region.

Energy Transfer LP announced in September that its Lone Star Express pipeline expansion was completed, adding more than 400,000 bbl/d of NGL capacity to the Lone Star pipeline system in Texas and allowing the company to check off a big part of its 2020 capital program.

The 352-mile, 24-inch pipeline provides more connectivity options from the Permian and Delaware basins. It starts in Winkler County and connects into the Lone Star Express 30-inch pipeline at the Morgan Junction in Bosque County, south of Fort Worth. The system ultimately connects into Energy Transfer’s Mont Belvieu liquids storage and fractionation facility.

Kinder Morgan’s Lockridge natural gas pipeline went into service in September as well, easing the capacity crunch in the region and providing an outlet for producers forced to flare gas before COVID-19 reduced demand. The 17-mile pipeline can move about 500 MMcf/d.

Demand destruction did, in fact, destroy the justification to build Enterprise Products Partners LP’s Midland-to-ECHO 4 crude oil pipeline project (M2E4).

The decision was “a sensible move in light of excess Permian long haul crude oil pipeline capacity,” Simmons Energy concluded in a research note. Tudor, Pickering, Holt & Co. applauded Enterprise’s strategy, noting that the positive impact on near-term cash flow beat out a modest impact on 2022 earnings.

“We continue to rank the equity as our preferred holding among U.S. large caps,” the Tudor analysts wrote. And with good reason.

A.J. “Jim” Teague, co-CEO of Enterprise’s general partner, may not bear a resemblance to Kenny Rogers, but he knows when to hold’em and knows when to fold’em.

Even though he canceled M2E4, he kept customers happy by amending agreements to support their crude oil transportation using existing Enterprise pipelines.

With the company’s Sea Port Oil Terminal, 30 miles offshore Freeport, Texas, Enterprise chose to hold, acknowledging in September that it did not expect permit approval in 2020. The U.S. Coast Guard and the Maritime Administration said in June that they had suspended their review of the project, also backed by Enbridge Inc., until the companies had provided more information.

Appalachia

The pattern of “if you’ve already been building it, completion will come” continued in the Northeast, where construction on Shell’s epic ethane cracker slowly picked up tempo after it was shut down by the coronavirus in March.

The complex in Potter Township, Pa., will produce about 1.6 MMtonnes/year of plastic pellets after its expected completion in the early 2020s. Shell said the project’s workforce was back up to 6,500 by October, and the complex was 70% complete and on schedule.

The Mountain Valley natural gas pipeline, however, faces a murkier path to completion after Equitrans Midstream Corp. said in October that it will evaluate the cost and timing of the project as a result of ongoing litigation and upcoming federal approvals. FERC gave Equitrans the green light to proceed with some construction.

UPDATE:

Court Allows Equitrans to Keep Building Mountain Valley Pipeline

The company has promised in-service in early 2021, but analysts expect that time frame to be pushed to the middle of the year, at least, and possibly the third quarter. Equitrans said in October that the pipeline is about 92% complete (although FERC’s estimate was about 84%), but its estimated cost has ballooned from $3.5 billion to as high as $5.7 billion, depending on how long litigation from environmentalists delays construction.

In late October, EQT Corp. said it was in talks to offload some of its capacity on Mountain Valley. The company cut back on gas production in September in response to low prices but started to bring back production in October.

For the beleaguered Mariner East 2 NGL pipeline, difficulties stemmed not from the feds but the state. Pennsylvania environmental regulators ordered Energy Transfer’s Sunoco Pipeline unit to reroute a section in September after an 8,000-gal drilling fluid spill in Marsh Creek State Park.

The reroute could delay completion of Mariner East 2’s upgrade, which was expected in second-quarter 2021. The 350-mile pipeline expansion was originally scheduled to be completed in third-quarter 2017 but has been charged with more than 100 violations by the state.