Marketing Optionality - New Magellan, P66 and Plains Permian Projects

Earlier this week, LawIQ released its latest Permian Edge report that tracks the progress of pipelines providing takeaway capacity for the Permian region across the three types of commodities -- crude, natural gas and NGLs -- with project scoring criteria to assess developer commitment and progress for specific projects. The most recent crude report included, for the first time, two additional projects, Phillips 66 and Plains’s Red Oak Pipeline, and Magellan and Navigator Energy Services’s Voyager Pipeline.

Today, we look at these two projects and consider a unique aspect that neither the incumbent pipelines nor the other Permian crude projects have, which is providing optionality for the supply end of the pipeline. Both projects have announced that they will source crude not only from the Permian, but also from Cushing, Oklahoma. Like many other projects, these projects are heading to the Gulf Coast Region, but are emphasizing the ability to source the crude from both points of origination. They will need to compete for this business against the uncommitted rates of the incumbents, such as Seaway, Bridgetex, Sunoco, Enterprise and Permian Express Partners.

Red Oak Pipeline

Source: Plains Investor Presentation

Red Oak Pipeline LLC is a 50/50 joint venture between Phillips 66 (NYSE: PSX) and Plains All American Pipeline (NYSE: PAA). As described by the companies and as depicted on the map above, the pipeline system will consist of a new 30-inch pipeline from Cushing, Oklahoma to Wichita Falls and on to Sealy, Texas. From there, the pipeline will split into a 30-inch pipeline segment to Corpus Christi and Ingleside and a 20-inch pipeline segment to Houston and Beaumont. The project is expected to cost approximately $2.5 billion.

A key feature of this project will be its ability to source crude from both Cushing, through the newly built pipeline, and from the Permian basin, through a lease on Plains’s Sunrise II Pipeline system, which extends from Midland to Wichita Falls, Texas, and which went into service last November. Simple math indicates that there will be at least eight transportation path pairs with two main origination points, Cushing and Midland, and four key destination points, Houston, Beaumont, Ingleside and Corpus Cristi. The companies announced that the project is already supported by long-term shipper volume commitments, that they have authorized construction to begin, and are targeting an in-service date from Cushing to the Gulf Coast for the first quarter of 2021.

Voyager Pipeline

Source: Magellan

Voyager continues to test the market for its proposal (now in the third open season), and the origination point optionality seems to be a key driver for determining whether the project will gather sufficient interest to move forward. Voyager is a joint venture between Magellan Midstream Partners, L.P. and Navigator Energy Services and is being marketed as originating at Magellan’s terminal in Cushing, OK and a new Voyager terminal in Midland, Texas, with destinations at Magellan’s East Houston terminal and the Seabrook Terminal in Houston, Texas. The pipeline, as currently designed, would require construction of 20-inch pipelines from both Magellan’s Cushing and Midland terminals to Magellan’s terminal in Frost, Texas. From Frost, a 24-inch diameter pipeline will be constructed to Magellan’s terminal in East Houston. The pipeline is expected to have an initial design capacity of up to 400,000 barrels per day. If sufficient commitments are obtained, it is targeted to be in-service in early 2021.

As Magellan explained in its press release that extended the open season to the end of August, the Midland origin would enhance the project’s supply flexibility from the prolific Permian Basin. As a result, the company is reviewing various facility options based on shipper demand, which could include the repurposed use of an existing Magellan pipeline and rights-of-way, new-build pipeline or a combination of both.

Why Two Origination Points?

Both pipelines may be highlighting the flexibility their two points of origin provide to their shippers, but this may be a case of making the best of a bad situation. As the maps for the two projects indicate, the two feeds come together far upstream of the ultimate destination and it may have been necessary to make the pathway to the Gulf viable from a financial standpoint. Certainly Red Oak is not taking the straightest path from Cushing to the Gulf and Voyager is clearly trying to find additional commitments by adding the Midland point to its project and extending the open season. So this double origin may have been a necessity for both pipelines.

Cost Structure for Crude Movements from Midland and Cushing to the Gulf Coast

LawIQ recently acquired and integrated a data set that provides detailed tariff rate information for all intra and interstate liquids pipelines in the United States, as well as in Canada. Using that data, we show below the uncommitted rate structures for some key pipelines with similar origin and destination points.

As seen in the chart above, the paths from Cushing will be competing against Seaway Crude’s current $4.00 per barrel uncommitted rate and the Midland to Houston will mainly need to beat the Enterprise Crude Pipeline’s $7.00 per barrel uncommitted rate. That price differential may have also been a factor in the pipelines efforts to add a Permian element to their projects. But in addition, these projects, if they go forward, will have the ability to offer an optionality that the incumbents cannot.

Things to Watch

MVP Striking Deal For Land Exchange at Appalachian Trail Crossing

Described transaction unlikely to remove AT crossing risk
Solution will likely be challenged in court
If so, Mid-2020 in-service date is likely a best-case estimate

Permian Highway Decision Expected

Travis County Court expected to rule any day on whether to suspend condemnation actions
Austin City Council voted unanimously to oppose the project
31 miles of the pipeline is in Hays County which is leading the litigation
To date, PHP has acquired no easements in Hays County

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Insights Coming Soon

A look at FERC's current backlog on CPs
Focus on key shipper and protestor positions related to Emera Maine