Projecting Permian Transport Rates and Revenue
Talk of the Town - An LNG Audit and FERC and PHMSA Coordination A new interstate natural gas pipeline is required to provide a calculation of the company’s tariff rates when it seeks FERC authority to construct and operate the pipeline. For instance, when Rover Pipeline filed its original application, it filed a tariff that indicated it intended to charge zone rates that varied from $7.1589 per dth/month to $30.6555 per dth/month. In addition, it estimated that its annual revenue would be $743 million based on a capital expenditure of $4.215 billion. Thus, even though Rover didn’t reveal its actual revenue and rates until after it went into service, the markets had some immediate insight into the cost that shippers would incur for using the pipeline, as well as the revenue that the pipeline company would receive once the project is in service.
Like many other aspects of projects being built to bring Permian production to market, transparency into actual revenue and rates is not commonly available for the intrastate natural gas projects nor is it for the crude and natural gas liquids projects being built in that region (See Permian Buildout - Helping to Solve the Mysteries of Texas ). However, because a company will generally expect a similar return on its investment, regardless of the commodity being transported or the region of the country in which it is operating, we can use the data we have on previously constructed projects, including Rover, to gauge what the rate may be for some of the Permian projects, and also estimate the revenue the pipelines might expect once they are completed. Calculating the Payback for a Pipeline Investment A simple measure of the payback a pipeline company requires for making an investment in a new pipeline is to calculate the number of months it will take for the revenue generated by the pipeline to equal the investment made. The longer this period is, the lower the company’s return on its investment. Likewise, a shorter period would signify a higher return on investment for the pipeline company. The chart below is a calculation of this payback period for eight new pipelines for which we have the estimated cost and the actual annual revenue from the contracts that were signed to support the pipeline’s construction. As depicted below, the pipeline generally recoups its investment within five to seven years after the project goes into service.
Projecting the Revenue and Rate for Permian Projects
As part of our Permian analysis, we are currently tracking the progress of 15 projects that are designed to bring either crude, NGL or natural gas to market from the Permian basin. Only five of these projects have announced the anticipated cost of constructing the pipeline. But by applying the historic information we have on the natural gas pipelines that have been built, we can begin to bracket the expected costs to shippers and the anticipated future revenues of these five pipelines.
Three of the natural gas pipelines have announced their expected cost. By using the median payback period for the projects that are in-service, 75.25 months, we can calculate a rate for each of the proposed pipelines. For the three natural gas pipelines, these rates are very different. The Gulf Coast Express pipeline, which we view as being the furthest along in the process, is apparently the low cost leader, with a projected daily rate of $0.386 per dth, followed by Permian Highway Pipeline at $0.437 per dth/day and then Permian Global Access at $0.808, or about double that of Gulf Coast Express. Such a low rate for the Gulf Coast Express pipeline may explain how it got the jump on the other projects. Going forward, whether it will be able to bring that rate in, or not, will be key.
Only one NGL and one crude pipeline have announced their expected capital costs, Grand Prix and Gray Oak, respectively, and their rates per barrel/day are very similar. Again using our median payback period, Grand Prix would need to receive from its shippers a committed rate of only $1.262 per barrel/day and Gray Oak would need to receive only $1.201 per barrel/day. The rates for the proposed NGL and crude pipelines compare favorably to the current walk-up rates for existing pipelines providing takeaway capacity from the Permian.
Our friends at Leonard B. Levine & Associates provided us with the following current rates being charged for transportation from West Texas to East Texas by the following pipelines:
Pipeline’s Expected Annual Revenue
While being a low cost provider may win business, the more capital a pipeline deploys equates to higher anticipated revenue. Therefore, the higher cost capital projects would typically result in more revenue. The key for measuring the beneficial nature of these projects for their owners will be in determining where, within the range of the payback period, they fall. Clearly, the optimum circumstances are to be a low-cost pipeline, which wins the support of its shippers, but then recoup one’s investment at the lower end of the payback period, thus rewarding the project’s investors. However, if we use just the median payback period and apply it to all of the five proposed projects, we see that the revenue numbers are as follows:
Insights Coming Soon
- Wave 2 501G analysis
- Top ten contractor analysis