Permian Buildout - Helping to Solve the Mysteries of Texas

The Marcellus/Utica shale formations revolutionized the natural gas markets in the United States, but the Permian Basin in Texas and New Mexico is poised to change the crude market for the entire world. Most agree that a key limiting factor on continued growth in the output from this basin is the pipeline infrastructure needed to take all of the production of crude, natural gas liquids (NGL) and associated natural gas to markets.

Not surprisingly, there are a number of companies angling to be the solution for this lack of pipeline capacity. Earlier this month, Kinder Morgan Texas Pipeline LLC, a subsidiary of Kinder Morgan, Inc., and EagleClaw Midstream Ventures, LLC, a portfolio company of Blackstone Energy Partners, announced a final investment decision (FID) to proceed with the Permian Highway Pipeline Project. Such announcements are common and are an early indicator that the project will likely be built.

But for anyone who is familiar with the process for permitting and certificating a natural gas pipeline before FERC, wandering into Texas can be disorienting. First, the sheer size of the state makes it hard to compare because it is possible to build a 600-mile pipeline that never leaves the state. Second, for those familiar with the FERC process for certificating and then permitting a natural gas pipeline, the usual series of gates through which a project passes aren't necessarily in the same order or may be non-existent. So, one needs a different way to assess the viability of projects in such an environment -- and we have developed one here at LawIQ, which we plan to update and enhance regularly for our customers.

Ranking the Proposed Projects

Because of Texas's unique regulatory structure discussed below, predicting when a project will go into service is not as well understood as for FERC-regulated projects, where certain milestones can be measured and compared from one project to the next. Instead, the analysis needs to be more qualitative, especially given the limited historical data for analysis. So rather than creating a predictive model for the various projects in the Permian basin, we have gathered data for each project that will allow us to measure the progress that each project is making in each of four phases of project development, approval and construction. We rank the projects based on their progress within each of the four phases, and then make a qualitative judgment as to each project's overall progress.

Based on this analysis, we have ranked the projects within each category of the product that they intend to move, i.e., crude, NGL, and natural gas. What is clear is that most of the crude and NGL projects are much further along in development than the natural gas projects, which are generally still being marketed.

What is Different in Texas and What is the Same?

Because almost all of the pipelines being proposed to solve the takeaway constraints for the Permian never leave the state of Texas, one needs to understand a key difference between an inter state natural gas pipeline and any type of Texas intra state pipeline. Pipelines in Texas are regulated by the Texas Railroad Commission (TRRC), but as stated on its website, its jurisdiction over intrastate pipelines is limited to "pipeline safety and pipeline rate regulation."
Most significantly, unlike FERC, the TRRC explains that in Texas, "pipelines are not required to be permitted before being built. There is no statutory or regulatory requirement that a pipeline operator seek or receive from the Railroad Commission either a determination that there is a need for the pipeline capacity or prior approval to construct a pipeline and related facilities." In addition, the TRRC has no "authority over the routing or siting of intrastate or interstate pipelines. The pipeline route is determined by the pipeline's owner/operator."
Despite this major difference in regulatory oversight, the commercial/permitting phases of a project are similar. At LawIQ, we have grouped these commercial/permitting activities into four phases:

Phase 1 is marketing and generally will include scoping the project size based on private conversations with potential shippers, perhaps conducting an open season to solicit additional interest, and almost certainly making a big public announcement about the intent to build the project.
Phase 2 is planning, which generally includes finalizing shipper support to fix the capacity of the pipeline, conducting initial surveys to find an appropriate route, assessing the need for permits and perhaps filing initial applications, and usually making the FID to proceed with the project.
Phase 3 is execution and that generally entails acquiring the needed right of way through private negotiations and, if needed, condemnation actions filed in state courts. We intend to track these activities closely as the rights must be obtained before construction can begin. This phase also includes filing a New Construction permit with the Texas Railroad Commission, which does not need to be approved, but which must be on record before construction can begin.
Phase 4 is construction and in addition to actual construction, this phase will usually include filing of a tariff with either the TRRC or FERC, or both.

Progress Matters More than Order

While each developer will generally complete the steps in each of these phases, such as the routing of the pipeline itself, the order in which they do them, is in the hands of the developer. A good example of how the phases don't necessarily occur in sequence is the recent case of the Permian to Katy Pipeline, a 2 Bcf natural gas pipeline that was being jointly developed by Sempra Energy and Boardwalk Pipeline Partners. It had the big, splashy public announcement and had set up a website (Phase 1), announced that it intended to reach an FID by the fourth quarter of this year (Phase 2), and even filed for an operator's permit from the TRRC and submitted its route map to the TRRC (Phase 4). But then in June of this year, the website was taken down, the route map on the TRRC website was changed to "Abandoned/(Pipeline Never Built)" and the project apparently has died a quiet death.

Putting it all Together

As for overall progress, we value the later phases as being more indicative of the actual viability of the project. For instance, if a project has completed all of the activities in the Marketing phase, but has not made progress on any of the activities in the later phases, the project would only be considered as having completed 10% of the total project. Phase 2 is worth 20%, Phase 3 is worth 30% and progress on Phase 4, the actual construction, is worth the most, 40% of the overall project.
Based on this qualitative assessment of the project's progress, we then compare that progress to the project's proposed in-service date. If the proposed in-service date seems reasonable given the current progress, then the project has been color-coded green in the charts above; if the projected in-service date seems aggressive given the current project progress, the project is color-coded yellow; and if the in-service date seems unlikely given the current project progress, it is color-coded red. One project is so new that the developers, ExxonMobil and Plains All American Pipeline, haven't even announced an estimated in-service date.

Insights Coming Soon

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Review of key project cost metrics

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