The rush to expand crude oil transportation to and around the U.S. Gulf Coast has triggered conflict between some major and independent midstream operators.
Several claims before the Texas Railroad Commission, which has jurisdiction over pipelines in the state, accuse big operators of not allowing independents the open connections that are required under common carrier rules. A ruling in one case is expected in April, but there are many more disputes that have not made it to formal regulatory filings.
Industry observers suggest that while spats over interconnection are endemic in the midstream, the number and size of the current disagreements reflect fundamental changes in the first and last miles of projects. Not too many years ago trunk-line operators were reluctant to get involved in the first mile of gathering, and were mixed on interest in the last mile. The bust of the shale bonanza changed all that.
“During the boom years the midstream companies built trunk lines and told producers, in effect, ‘you’ll be lucky if we let you on,’” Sandy Fielden, director of oil and products research at Morningstar, told Hart Energy. Field is the author of a Feb. 6 report on the issues facing midstream operators in the crowded Gulf Coast connection arena.
“Now that pipelines are overbuilt, and shippers are in a position to renegotiate, the midstream companies are realizing that it is easier to control the barrel back to the wellhead,” he said. “Then they can charge for gathering, for trucking, for rail and for trunk line transportation.”
With the first mile in place, attention now turns to the last. Houston is at present overserved with incoming pipeline capacity, but the region expects to handle growing crude volumes this year and for the next few.
“Midstream infrastructure companies have not ignored this challenge,” says Fielden’s report. “The Houston crude distribution system continues to expand and has lately become very competitive….While Magellan dominates Houston pipeline distribution, the company lacks dock space for export. Magellan has docks at Galena Park, but those are primarily for refined products.”
“To remedy that gap, Magellan entered a joint venture with LBC Tank Terminals in 2015 to build crude storage and a deep-water dock at LBC’s existing Gulf Coast terminal at Seabrook, Texas. The first phase of the project, with 700,000 barrels of storage, is due online in the next few months. Investment plans for mid-2018 include expanded storage and docks, as well as pipeline links to and from Magellan’s Houston distribution network at Genoa Junction.”
Smaller operators are also active. Fairway Energy Partners Pierce Junction facility, with 11 million barrels of salt-cavern crude storage, is expected online in April. The Fairway facility is connected by pipeline to and from both the Genoa and Speed junction terminals. Also, Vopak and Houston-based operator Moda Midstream, backed by Encap Flatrock Midstream Capital, have formed Vopak Moda Houston (VMH). That venture plans a storage terminal on the Houston Ship Channel expected online in late 2018 or 2019.
The Morningstar report stresses that “these stand-alone assets rely on connectivity to the rest of the Houston crude system….Recent filings with the Railroad Commission suggest that the process of connecting Houston infrastructure has become strained. Both Fairway and VMH have filed complaints concerning Magellan’s failure to provide them with requested connections. Fairway filed an initial complaint in March 2016, and VMH filed its subsequent complaint in January 2017, requesting that the commission combine both complaints under the same docket. An administrative law judge is expected to provide a further ruling on the dispute in April.”
While it is possible that the parties could get their differences sorted themselves, Fielden said, “if you read the filings at the Railroad Commission they are quite bitter. That is a reflection of a more competitive market. The while issue is that the stand-alone guys are no good without connections. But why would the big guys let competitors connect?”
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