White Cliffs Market Based Rate Ruling Could be a Juggernaut
Crude oil takeaway capacity from the Niobrara region, including the Denver Julesburg Basin (DJ Basin), has been growing in recent years to the point where some believe it is now “overbuilt.” But the production from the region is also growing and so, even if it is currently overbuilt, that situation may not last for long. In the midst of this uncertainty, White Cliffs Pipeline, the first pipeline to connect the DJ Basin to Cushing, Oklahoma, filed at the end of 2017 for authority to begin charging market-based rates for the transportation of all crude oil from the counties that encompass the Niobrara shale region.
How FERC rules on White Cliffs’ request -- which is set for an initial decision by the FERC administrative law judge on August 13, 2019 -- could mean that other pipelines may seek similar market-based authority. Shippers are opposed, fearing that “upon securing market-based rate authority, White Cliffs will elevate its rates to levels well above [previously-effective maximum tariff rates, leaving] its shippers basically powerless to resist.” Such concern will grow if other pipelines in the region also seek the right to use market-based rates.
If you have an interest in White Cliffs’ owners, including SemGroup, its competitors, such as Tallgrass’ Pony Express Pipeline, or the producers from that region that include Anadarko, and Noble Energy, you should be aware of this proceeding and how it may impact the revenue for these companies. This is yet another case in what promises to be an active year for FERC with respect to contentious oil rate and market issues, including the Magellan marketing affiliate case and the Colonial Pipeline rate case.
Pipeline Capacity and Production Growth
According to the U.S. Energy Information Administration, oil production from the Niobrara region peaked in late 2014, then fell through the end of 2016, but has seen a more than 50% increase since then, to well over 600,000 barrels per day. The region is home to a number of oil plays, as shown in the map, which accompanied the testimony filed by FERC Staff in the White Cliffs proceeding.
Growth in Pipeline Capacity
Despite the downturn in production in 2015 and 2016, there have been a number of expansions of the crude pipeline system over the last few years.
This has led to the understanding that there is now more pipeline capacity than is needed in the region. In fact, in a supplement filed on July 30, 2018, White Cliffs explained that it had elected to forgo a 30,000 barrel per day expansion it had planned for 2018, and instead was planning to convert one of its two pipelines from a crude oil line to a natural gas liquid line. This conversion project would reduce the current operational crude capacity of White Cliffs from 185,000 to 95,000 barrels per day (and causes the reduction in 2019 in the chart above).
Request for Market Based Rate Authority
White Cliffs’ request for authority to use market-based rates for crude service from the Niobrara region to Cushing, Oklahoma was opposed by a group referring to itself as the “Liquids Shippers Group” (LSG), which includes Bill Barrett Corporation, ConocoPhillips Company, Kerr McGee Oil & Gas Onshore, LP, and Noble Energy, Inc. Under FERC rules, an oil pipeline that wishes to be freed from the constraints of filing a tariff for every rate it offers and to begin setting rates based on the market is required to: (1) define the relevant geographic and product markets, including both origin and destination markets; (2) identify the competitive alternatives for shippers, including potential competition and other competition constraining the pipeline’s ability to exercise market power; and (3) compute the market concentration and other market power measures.
In an order issued in May 2018, FERC determined that White Cliffs had demonstrated that it did not have market power in the delivery market of Cushing, Oklahoma, but established a hearing process to determine whether White Cliffs had market power in the proposed origin market, the Niobrara region. The main arguments in the proceeding therefore are focused on how to define the product and the region for purposes of calculating White Cliffs’ market power. The broader these terms are defined, the more likely it is that White Cliffs will be granted authority to use market-based rates, because the bigger the market, the less market power White Cliffs would be found to have.
In late November, FERC Staff weighed in with its own expert opinions on these two key issues. FERC Staff’s opinion was basically the same as White Cliffs’ with respect to the definition of the product, which should be all crude oil and not just the types of crude for which White Cliffs currently offers service. But the FERC Staff narrowed the geographic region by finding that the producers who could use White Cliffs’ pipeline for service could not use all of the other forms of transportation available to producers in the entire Niobrara region, but only the pipelines that serve the DJ Basin. As shown on the map above, White Cliffs argued that the market should be defined as the entire area in dark yellow. LSG’s position was that the geographic should be limited to the magenta area and FERC Staff asserted that it should be the green area surrounding the magenta area.
What Does All This Mean?
Should the Commission adopt the recommendation of the FERC Staff witnesses, White Cliffs will be granted authority to use market-based rates for shipments of all crude oil products originating from the DJ Basin and ending at Cushing, Oklahoma. In addition, should FERC adopt the definition of the market set forth by the Staff witnesses, it would appear that the other three pipelines serving this same market, Pony Express, Saddlehorn and Grand Mesa, could also obtain such authority if they were to seek it. As feared by the LSG, such authority could lead to transportation rates that exceed the current maximum tariff rates allowed for these pipelines. Whether that will actually happen, though, is dependent upon whether the oil produced in the region eventually outpaces the pipeline capacity. FERC Staff found that the current pipeline capacity from the basin is 2.1 times the current production, so there certainly would need to be substantial production growth before the fears of the LSG become a reality.
Insights Coming Soon
- Gas projects heading to Gulf, pipe & terminal timing
- Review of market share of Asset Management Agreements (AMAs)