AP NEWS
Related topics

Texas pipelines draw attention, expansion plans in oil boom

November 14, 2018

HOUSTON (AP) — Pipelines have traditionally operated as the dull middle man of the energy sector, a business so boring that the hard-charging Enron dumped its pipeline holdings to chase sexier businesses during its rapid, but short-lived rise.

The Houston Chronicle reports today, however, the once sleepy industry is where the action is, attracting billions of dollars in investment, launching new companies and spurring a wave of mergers, acquisitions and sales.

Nowhere is the action more intense than in Texas, where companies of all sizes, public and private, are planning to spend more than $40 billion to build or expand almost 10,000 miles of pipelines — long enough to stretch from West Texas to China — to connect booming oil production in the Permian Basin primarily to refining and export markets along the Gulf Coast.

The players buying and building pipelines include the world’s largest energy companies, such as Exxon Mobil of Irving, major Houston pipeline companies like Kinder Morgan and Plains All American, refiners such as Phillips 66 of Houston, and a growing list of startups backed by private equity investors. Over the past few years, analysts count dozens of new pipeline companies entering the market and more than 20 multibillion-dollar projects potentially getting underway.

“They seem to be announcing new pipelines every day,” said Sandy Fielden, director of oil and products research at Morningstar, the Chicago investment research firm.

Texas is at the center of the action, aided by its friendly regulatory climate as well as its vast energy resources. Texas accounts for about 40 percent of the nation’s record oil production — which the Energy Department estimates at 11.6 million barrels a day — with most of it coming from the Permian. Along with oil, energy companies also are producing record volumes of natural gas and natural gas liquids, such as ethane, propane and butane, which feed the petrochemical industry that’s also expanding rapidly along the Gulf Coast.

But the rapidly rising production has outpaced pipeline capacity, leading many companies to leave oil in the ground and burn off natural gas in a practice known as flaring until new pipelines can carry their energy products to market.

“We’re feverishly trying to address the needs of the Permian Basin,” said Jeff Welch, president of NAmerico Energy, a pipeline startup based in The Woodlands. “These pipeline projects can’t come soon enough.”

NAmerico is trying to build the 460-mile Pecos Trail natural gas pipeline that would stretch from the Waha oil field in the Permian to just west of Corpus Christi in Agua Dulce, where it would connect to existing pipelines across the Gulf Coast or into Mexico to feed power plants and liquefied natural gas export facilities. The pipeline carries a price tag of more than $2 billion.

NAmerico, backed by the Dallas private equity firm Cresta Energy Capital, is an example of the flood of private equity money coming into the pipeline. Private equity firms pool money from wealthy institutional and individual investors and seek undervalued and emerging assets that have the potential to yield bigger returns than traditional investments, such as stocks and bonds. Private equity firms snapped up Permian acreage at discounts during the oil bust and, after cashing in, moved into the Eagle Ford shale in South Texas, where drilling activity is picking up, and the Gulf of Mexico, where offshore blocks can be acquired at bargain prices.

Now, private equity is moving more into pipelines, which hold the promise of big payouts through quick and steady cash flow — pipelines make money even before oil and gas is sold — with the potential to flip them for outsized profits.

NAmerico launched in 2014 with big goals. Rather than focus on smaller regional pipeline networks, NAmerico opted for larger, long-haul pipelines, coming up with the first proposal for a major new gas pipeline. Welch joked that he sometimes asks himself late at night why he went that route. Securing the necessary long-term contracts to finance the project is tough, especially when it’s a private startup versus well-known industry players such as Kinder Morgan, Targa Resources of Houston and Williams Cos. of Tulsa, Oklahoma, which have all since progressed competing projects.

“It’s proven somewhat challenging on our part to overcome that stigma,” Welch acknowledged. “We are in a pretty strong footrace.”

Another new private equity-backed player is EPIC Midstream, which was launched in early 2017 with the private equity firm Ares Management of Los Angeles. EPIC is building both crude oil and natural gas liquids pipelines that will traverse the state from southeastern New Mexico to Corpus Christi. It’s 700-mile NGL pipeline is scheduled to go into operation in the third quarter of 2019, but will initially transport crude oil until EPIC’s crude system starts up in early 2020.

Private equity has also driven a series of multibillion-dollar deals. Houston oil producer Occidental Petroleum recently sold its Permian pipeline network and its oil-exporting terminal near Corpus Christi for $2.6 billion to two private equity Houston startups, Lotus Midstream and Moda Midstream. Much of Medallion Pipeline of Dallas was recently sold from one private equity firm, The Energy & Minerals Group, to another, Global Infrastructure Partners, for about $2 billion.

Another Houston producer, Apache Corp., is forming a partnership with the Los Angeles private equity firm Kayne Anderson to spin off its Permian pipeline into a new $3.5 billion company called Altus Midstream.

“Private equity is playing an outsized role here,” said Ethan Bellamy, an energy analyst at Robert W. Baird & Co.

Private equity firms, however, are not the only deal makers. Last year, in the biggest pipeline deal of late, Canada’s Enbridge bought Houston-based Spectra Energy for $28 billion. The Woodlands exploration and production company Anadarko Petroleum this month said it would sell its pipelines — primarily in West Texas and Colorado — to its spinoff Western Gas Partners in a $4 billion stock-and-cash deal.

In the most unusual deal, the Canadian pension fund OMERS — the Ontario Municipal Employees Retirement System — recently paid $1.5 billion for a 50 percent stake in the expanded BridgeTex oil pipeline that runs from the Permian to Houston.

But the quickening pace of deals is not only raising the profile of pipelines among energy companies and investors, but also environmentalists. Concerned about climate change, pipeline accidents and the impact on environmentally sensitive areas, activists have launched aggressive campaigns and protests to block pipelines in recent years, notably the Canada-to-Nebraska Keystone XL, whose construction was blocked again Thursday by a federal judge in Montana, and the Dakota Access that begins in North Dakota. In Louisiana, ongoing protests are trying to stop construction of the Bayou Bridge pipeline from Port Arthur to St. James, Louisiana.

The lack of pipeline capacity in Texas is adding another complication to the environmental debate — particularly in the Permian. Unable to transport the natural gas that is a byproduct of pumping oil, producers are simply burning it off.

Natural gas is mostly methane, a potent greenhouse gas that contributes to global warming. The Permian is approaching 400 million cubic feet of gas flared daily, which is more than $1 million of natural gas a day, analysts said.

“With the climate crisis, what’s happening out there is unimaginable,” said Sharon Wilson, a Texas organizer for the environmental advocacy group Earthworks. Wilson said the answer isn’t building more pipelines, but rather finding cleaner energy sources and reducing the use of fossil fuels.

Energy companies and analysts have a different solution — more pipelines — but agree that flaring is a problem. Some companies are reducing oil production in Texas because they’re on the verge of surpassing the amounts of natural gas they’re legally permitted to flare in the state, said Sunil Sibal, an energy analyst with Seaport Global Securities in New York.

“It’s really bad optics,” Sibal said. “Without having an outlet for the gas, it becomes more of a critical issue. They’re flaring pretty aggressively and the situation is going to get worse.”

___

Information from: Houston Chronicle, http://www.houstonchronicle.com

AP RADIO
Update hourly