U.S. crude production, a plurality of which comes from the Permian Basin, has already restructured global oil markets in a permanent way. That bonanza also has altered capital markets, as questions of long-term profitability shift some investors to the midstream.
The current infrastructure investment boom includes seven proposals for new Permian pipelines, four of which have ultimately reached final investment decision (FID). Those are expected to move an additional 4 MMbbl/d of oil bound for the U.S. Gulf Coast by year-end 2022. More than 2 MMbbl/d of that new capacity will make its way to the Corpus Christi market for export, according to Wood Mackenzie.
There is a feeling of the stretch run in the Permian midstream. There are expectations for long-haul crude transportation that will need to be met this year or next. The same may even be on the horizon for gas, with the added political and environmental pressure to curtail massive flaring. There have even been murmurs of possible overbuilding.
Still old hands know that the midstream is never really finished. In the case of the Permian, there is now research to clarify that. Wood Mackenzie is forecasting that more pipeline investment will be needed before the 2030s because as much as half a million barrels per day of crude may need to be moved by then.
That midstream treadmill is likely to continue for a while but not indefinitely. “Capital markets are going to help by moderating the breakneck development in the Permian,” said Greg Haas, director at Stratas Advisors. “We have already seen capital discipline ripple through the upstream and midstream in previous cycles and that is starting to be apparent this time as people consider projects that take billions of dollars and several years. Level production will help the midstream keep pace,” he said.
The current narrative is focused very much on the short term, according to John Coleman, Wood Mackenzie’s principal analyst of North American crude markets, in a HartEnergy.com article. “There will be excess capacity. But looking beyond the next five years, we expect growth to continue, driving the need for either one new [line] from the Permian to the Gulf Coast or expansion probably across multiple systems,” he said.
Coleman stressed that between now and then the Permian Basin is likely to see moderate overbuilding in the early 2020s as the current wave of pipeline investments are completed.
U.S. Gulf Coast-bound capacity will tighten as production growth expands well in the 2030s, and Coleman suggested that if new pipe is not added in the Permian by the mid-2030s, takeaway will become a major concern again. Without more investment, the Permian-to-Gulf Coast pipelines could surpass 92% of capacity. That eventuality would all but force pipeline expansions or greenfield capacity, he added.
Wood Mackenzie has production in the Permian Basin peaking at about 7.1 MMbbl/d by the late 2020s or early 2030s. The firm’s forecast differs with predictions from another analyst with Bank of America Merrill Lynch of production tripling to 9 MMbbl/d in the next three years during a time of concern of overbuilding.
The reindustrialization of America in recent decades has been much celebrated. And yet David Foley, senior managing director and CEO at Blackstone Energy Partners, cautioned, “The way to make money in commodities is to be the low-cost producer and not to get out over your skis. I have never been a fan of the idea ‘build it and they will come.’”
Attention naturally shifted to the business of getting that surfeit of molecules to market. “We had an opportunity to move downstream in several areas,” Foley said. “One was the Grand Prix NGL greenfield pipeline where we committed volumes and part of the equity upfront in 2017, which helped Targa commission the project in a timely manner. This is a critical 500,000-plus barrels per day pipeline coming online this summer, and it will deliver Permian liquids to Mont Belvieu for fractionation and on to customers on the Gulf Coast.”
Eagle Claw joined Kinder Morgan in a 50-50 joint venture (JV) to build Permian Highway, a 2-Bcf/d greenfield pipeline to deliver dry gas from the Waha Hub in the Permian Basin to the Gulf Coast. Exxon and Apache subsequently made commitments of volume as shippers and joined as equity partners in the project.
On the oil side, Foley noted a midstream catch-22: the bulk of U.S. exports are light sweet crude, which is in demand worldwide because it is easy for low-complexity refineries to convert.
“Investing in new construction of crude export facilities is tricky,” he said. “There is a lot of existing capacity, lots of existing sites with docks and storage tanks, and customers aren’t willing to commit to long-term contracts. In contrast, we clearly like LNG. Gas is a much cheaper and cleaner molecule, with a multitude of uses, especially power. There is a huge demand globally as a replacement for coal and oil fuels.”
In April EagleClaw Midstream, a portfolio company of Blackstone Energy Partners and I Squared Capital, made the FID on its proposed Delaware Link pipeline to transport residue natural gas from the Delaware Basin to the Waha Hub, with access to further downstream takeaway connections. Delaware Link is expected to be anchored by residue volumes from EagleClaw’s processing facilities as well as third-party customers. The approximately 1.2-Bcf/d, 40-mile, 30-in. diameter pipeline will originate at EagleClaw’s three existing natural gas processing complexes in Reeves County, Texas—East Toyah, Pecos and Pecos Bend. Even as the decision was made to proceed, Blackstone noted the level of producer inquiry and is already considering increasing the pipeline’s diameter and capacity.
Planned interconnections include direct access to the Permian Highway Pipeline. Permian Highway is a JV of Kinder Morgan, EagleClaw, Apache and another undisclosed anchor shipper. It is expected to be in service in the second half of 2020.
A month after the Delaware Link decision to proceed, EagleClaw commissioned its fourth cryogenic processing plant at its Pecos Bend site. Pecos Bend IV was included in EagleClaw’s 2018 acquisition of Caprock Midstream, and it took EagleClaw’s total interconnected processing capacity in the Delaware Basin to 1.3 Bcf/d. The Sierra Grande site in Culberson County, which was part of EagleClaw’s acquisition of Pinnacle Midstream, was connected to the overall system via a high-pressure connector line in June 2019.
EagleClaw claims primacy as “the largest natural gas gatherer and processor in the southern Delaware Basin.” EagleClaw is a partner with Targa on the Grand Prix Pipeline Project and with Kinder Morgan on the Permian Highway Pipeline Project. EagleClaw has long-term dedications for gas, crude and water midstream services in place over half a million acres from more than 25 successful and active producers in the Delaware Basin.
Also in May, Eagle Claw acquired PDC’s gas-related midstream assets for $182 million, comprising an initial $100 million payment at closing. As reported by HartEnergy.com, the remaining $82 million will be allocated as an unconditional payment one year post-closing.
Separately, WaterBridge Resources paid $125 million for PDC’s water-related midstream assets. PDC said it retained operational control of its freshwater supply as part of the transaction. Waterbridge is backed by private-equity firm Five Point Energy.
As part of those deals, PDC signed long-term commercial service agreements with EagleClaw for its gas gathering, compression, processing and transportation, and with WaterBridge for its water gathering and disposal.
Finding the level of water
In February Blackstone Energy Partners formed Waterfield Midstream with half a billion dollars to provide water gathering, treatment, recycling and disposal in the Permian Basin. Thus, Waterfield became the water midstream platform in the basin for one of the largest upstream private-equity houses. Blackstone has invested and committed approximately $16 billion of equity globally across a broad range of sectors within the energy industry.
The initial funding for Waterfield is for greenfield development as well as acquisitions of water-related infrastructure. Co-CEOs Scott Mitchell and Mark Cahill previously built and led Anadarko’s and Western Gas’ Permian Basin commercial water infrastructure.
As an initial foray, Waterfield signed a 15-year contract with Guidon Energy to build a new system across 40,000 acres in Martin County, Texas. Produced water will go back down into deep disposal zones, rather than shallow. The objective is to provide long-term flow assurance for hydrocarbon production above.
Separately, Waterfield struck an agreement with EagleClaw Midstream to operate its 58 miles of water gathering lines and 390,000 bbl/d of permitted disposal capacity in Reeves County, Texas.
In August H2O Midstream bought the produced water infrastructure of Sabalo Energy. H2O Midstream is funded via a private-equity commitment from EIV Capital and co-investments from several of EIV’s institutional partners collectively representing more than $70 billion in assets under management. Concurrent with the Sabalo acquisition, EIV Capital and multiple co-investors substantially increased their equity commitment for H2O Midstream to pursue additional growth opportunities throughout the Permian Basin. Sabalo is funded via a private-equity commitment from EnCap Investments.
Part of the deal was a 15-year acreage dedication by Sabalo in return for water gathering, disposal and recycling services. The acquired assets are adjacent to H2O Midstream’s existing operations in Howard County, Texas, and comprise 37 miles of pipeline, nine saltwater disposal (SWD) wells, four Ellenburger SWD well permits and several third-party interconnections.
The Sabalo system is already connected to H2O Midstream’s produced water gathering network, bringing the combined system to 435,000 bbl/d of disposal capacity and 240,000 bbl/d of deep disposal permits. In addition to the buildout to accommodate Sabalo’s development program, H2O Midstream is adding 40,000 bbl/d of recycling capacity with the option to expand to 80,000 bbl/d over time.
H2O Midstream owns and operates the Permian’s only truck-free, third-party produced water hub and pipeline network consisting of 1 MMbbl of storage and 435,000 bbl/d of permitted disposal capacity from 16 owned and six third-party SWDs, all interconnected via 190 miles of pipeline.
“The acquisition of Sabalo’s water infrastructure is an important step in realizing our vision of being the premier integrated water midstream provider in the Permian Basin,” said H2O Midstream CEO Jim Summers.
H2O also operates a partnership on University Lands (UL) in the Delaware Basin. UL manages the surface and mineral interests of 2.1 million acres of land across 19 counties in West Texas for the benefit of the Permanent University Fund. H2O Midstream and Layne Water Midstream handle produced water on UL through their UL Water Midstream (ULWM) JV. In January ULWM signed a long-term contract with UL to serve as the exclusive preferred water services provider on 167,000 acres in Ward, Winkler and Loving counties in the Delaware Basin to develop and operate water infrastructure. ULWM’s sponsors are EIV Capital, Genesis Park and Post Oak Energy Capital.
“We maintain an optimistic outlook on the midstream sector and follow closely what is happening in the upstream complex, particularly in the public markets, to calibrate our outlook,” said Sam Pitts, managing partner at EnCap Flatrock Midstream. “The rapid increase in production across many unconventional plays in the U.S. has not translated into corporate-level returns, and that has understandably disappointed the investment community. The resulting focus on capital discipline and free cash flow generation is clearly going to moderate growth, but it will also transform the producer community into more attractive companies from an investor’s standpoint. That is good for the upstream sector and ultimately benefits midstream.”
Specifically addressing the Permian, Pitts added, “We continue to view it as one of the largest and most productive hydrocarbon producing regions in the world. Issues such as spacing, basis differential and water disposal are byproducts of the rapid growth, so the moderation of that growth will allow for better supply chain management, midstream response and ultimately field development.”
Pitts and EnCap Flatrock have several Permian midstream portfolio companies. Cogent Midstream expects to commission its Big Lake II cryogenic processing plant in the fourth quarter and place its 20-in., 25-mile residue pipeline into service at the same time.
The Big Lake II Plant has the nameplate capacity to process 200 MMcf/d and brings Cogent’s total processing capacity in the Midland Basin to about 510 MMcf/d. The residue line will deliver natural gas from Cogent’s Big Lake gas-processing complex in Reagan County to Kinder Morgan’s Gulf Coast Express Pipeline. It has a total capacity of about 400 MMcf/d.
No discussion of gas in the Permian can take place without addressing the pernicious problem of flaring. The cold calculus from producers so far has been that between molecules and money, the better resource to waste has been molecules. The Texas Railroad Commission agreed in a ruling in early August about a contested permit to flare. Despite that ruling, political and environmental pressure is mounting. There is a strong argument to be made that doing something other than flaring is simply part of the cost of doing business for producers.
Pitts tried to draw a balanced position. “Our portfolio companies are in the business of transporting hydrocarbons and doing so as good stewards of the environment, so we are supportive of any efforts to stem flaring. However, we can’t control the absolute price of any commodity, so there is nothing we can do to influence the money versus molecule equation. What our portfolio companies can do is provide access to the highest value markets for those hydrocarbons. Our role in the value chain is to help producers maximize the value of their molecules by connecting them to the markets, which most desire their output and offer the best possible netbacks. In the Permian, we believe there are good business opportunities to provide that service. Natural gas prices at Waha are most certainly sending that signal.”
Check out the flaring sidebar to this story: Dispute Flares Over Flaring In The Permian
In January Exxon Mobil, Plains All American Pipeline and Lotus Midstream, an EnCap Flatrock portfolio company, announced the Wink to Webster Pipeline JV and ordered nearly 650 miles of domestically made 36-in.-diameter line pipe. The new common-carrier pipeline system will provide more than 1 MMbbl/d of crude oil and condensate capacity and will be constructed from the Permian Basin in West Texas to the Texas Gulf Coast.
The Wink to Webster system will have origin points at Wink and Midland, and it will run to multiple locations near Houston, including Webster and Baytown, with connections to Texas City and Beaumont. The project is underpinned by a significant volume of long-term commitments and is due in service in the first half of 2021.
“Over the coming year, I think you will see Lotus Midstream continue to develop and optimize the Centurion Pipeline System,” Pitts added. “Wink to Webster is a great project. Our overarching goal is to help build integrated midstream systems that connect hydrocarbon supply centers like the Permian to end users—whether U.S. refineries or overseas markets. Lotus’ combination of Centurion and the Wink to Webster pipeline is a good example of that.”
Whether planned transport in the Permian is sufficient or not will be dictated by the pace of production growth in the area, Pitts said. “Moving hydrocarbons out of the basin is an intensely competitive business. Wink to Webster was attractive to us because it feeds some of the largest refineries in the United States, and the owners of those refineries are our partners. Basinwide production may rise or fall depending on temporary changes in oil prices, but our partners’ refineries are going to run regardless of short-term price swings.
“Wink to Webster will be a major source of their feedstock, which we believe makes it one of the most resilient crude oil pipelines in the country,” Pitts continued. “Moreover, the Centurion system is one of the largest gathering networks in the Permian, which allows us to directly connect producers all across the region to the refiners that are shippers on Wink to Webster.”
At the far end of the pipe are tanks and docks. EnCap Flatrock has a portfolio company, Moda Midstream, in the terminal and logistics segment. “Midstream is a complex business, and success requires strong commercial, financial, engineering, operational, technical and customer service skills. Whether it is gathering hydrocarbons in the field, transporting hydrocarbons to a liquid market or storing hydrocarbons in terminals and loading them onto a vessel, we are first and foremost singularly focused on ensuring we have the technical expertise to build and operate the asset in a safe and reliable manner,” he said.
EnCap Flatrock backed Moda in 2015 “because we believed they were the premier blue water terminal and storage team in the business,” Pitts said. “Since Moda took over the Ingleside terminal in Corpus Christi, they have exceeded even our high expectations. In the short time they have owned the asset, they have increased efficiencies, capacity and loading rates, substantially grown storage capacity, and we believe they will continue to do so as they develop additional opportunities along the U.S. Gulf Coast.”
QIA investments in Oryx
In August Oryx Midstream Services, which claims primacy as “the largest privately held midstream crude operator in the Permian Basin,” announced that an affiliate of Qatar Investment Authority (QIA) acquired a significant stake in Oryx from an affiliate of Stonepeak Infrastructure Partners. In addition, QIA committed to investing in the development of Oryx alongside Stonepeak. The total QIA investment in Oryx will be approximately $550 million.
The partnership is the latest in a series of investments undertaken by QIA across the U.S., where QIA aims to increase investment to $45 billion in the coming years. Upon completion of the remaining part of the system under construction, Oryx’s total transportation capacity will exceed 900,000 bbl/d and connect to several long-haul transport options when current expansions are completed.
Oryx owns and operates a crude gathering and transportation system underpinned by nearly 1 million acres under long-term dedications from more than 20 customers. The system’s 2.1 MMbbl of storage and approximately 1,200 miles of in-service and under-construction pipeline span eight counties in Texas and two in New Mexico.
Lucid Energy Group
In July Lucid Energy Group signed a long-term natural gas gathering and processing agreement with XTO Energy, a subsidiary of Exxon Mobil. XTO will deliver gas from a portion of its leasehold in southeastern New Mexico to Lucid’s South Carlsbad gathering and processing system. The agreement provides XTO with firm processing capacity and enables deliveries of gas and liquids to Exxon Mobil’s downstream and chemical manufacturing sites on the U.S. Gulf Coast.
Lucid’s system in the northern Delaware Basin comprises more than 2,000 miles of pipeline spanning five counties in New Mexico and Texas. The company claims primacy as “the largest privately held gas processor in the Delaware Basin,” with more than 50 customers in New Mexico and West Texas. Lucid is supported by capital commitments
from a JV formed by Riverstone Global Energy and Power Fund VI, an investment fund managed by Riverstone Holdings, and investment funds managed by the merchant banking division of The Goldman Sachs Group.
Lucid also is adding new cryogenic processing capacity at its flagship Red Hills Complex in Lea County, N.M. The Red Hills V plant will process 230 MMcf/d of natural gas and will bring the total processing capacity of Lucid’s natural gas processing franchise in the northern Delaware Basin to 1.2 Bcf/d. Lucid expects to commission Red Hills V in the second quarter of 2020. The expansion will follow the anticipated commissioning of the 230-MMcf/d Red Hills IV plant in October.
Riverstone Holdings LLC is an energy and power-focused private investment firm with about $39 billion of capital raised and more than $37 billion committed to more than 160 investments in North America, Latin America, Europe, Africa, Asia and Australia.
Over the summer, Altus Midstream placed its first two cryogenic gas-processing plants and closed on two large pipeline JVs, Shin Oak and Permian Highway. The first two of Altus’ three new cryo plants entered service on budget and on schedule in May and July. They are in Reeves County, Texas. Cryo unit three is on schedule to process gas around the end of the year when its connection to the power grid is completed. Each unit has a nameplate capacity of 200 MMcf/d.
Altus is a pure-play, Permian-to-Gulf Coast midstream C-corp. Through its consolidated subsidiaries, Altus owns substantially all of the gas gathering, processing and transportation assets servicing production from Apache Corp.
“With the closing of our option on the Shin Oak NGL Pipeline, we are very pleased to be an owner in four premier Permian Basin takeaway pipelines,” said Clay Bretches, Altus CEO and president. “These pipeline equity interests provide customer and cash flow diversification and comprise a significant portion of our forecasted EBITDA in the coming years.”
Altus Midstream and/or its subsidiaries now own equity interests in four long-haul Permian Basin takeaway pipelines, including the
- Gulf Coast Express:
»» 16% interest in a gas pipeline to Agua Dulce;
»» operated by Kinder Morgan; and
»» expected in-service date in late September 2019;
- Permian Highway:
»» 27% interest in a proposed gas pipeline to Katy/Agua Dulce;
»» operated by Kinder Morgan; and
»» expected in-service date of October 2020;
- Shin Oak:
»» 33% interest in the NGL line to Mont Belvieu;
»» operated by Enterprise Products Partners; and
»» this line is in service.
- EPIC Crude:
»» 15% interest in a crude oil pipeline to Corpus Christi; and
»» expected in-service date for the permanent line is in the first quarter of 2020.
- Salt Creek NGL Line:
»» Altus holds an option for a 50% equity interest; and
»» the regional pipeline connects Alpine High to Waha.
New Wave of Upstream Bankruptcies May Vex Midstream
Against the rising tide of molecules that midstream operators are scrambling to gather and move, there is a counter-current that may give everyone some breathing room. According to a report released Aug. 14 by Haynes & Boone, a major law firm in energy, bankruptcy filings by U.S. energy producers so far this year have already nearly matched the total for the whole of 2018. A total of 26 firms with aggregated debt of $11 billion have filed for protection and restructuring through just the first seven and a half months of 2019.
Not only has the pace year-on-year increased, but the rate is also accelerating. Haynes & Boone noted that of 26 filings so far this year, 20 of them have been since May. Last year 28 companies filed for bankruptcy, listing $13.2 billion in debt, and 24 firms sought protection in 2017 with $8.5 billion owed, according to Haynes & Boone. In 2015 there were 44 producers that sought protection while owing $17.4 billion.
To normalize those rates, the 2017 filings averaged exactly two per month. That ticked up to seven every three months for 2018. The pro forma rate for 2019 would be seven every two months or an ominous 42 for the year.
Specific to the midstream, only one pipeline operator, Southcross Energy Partners, has filed for bankruptcy so far this year. It listed debts totaling $828 million.
It is low prices that are driving producers to the courthouse door—that, plus persistent levels of debt. There is not yet any overall capital shortage in the sector, but lenders and private-equity firms are scrutinizing the producers they are backing more intensely than in recent years.
To be sure, it is not expected that the recent spike is the start of a larger surge of bankruptcies. The Haynes & Boone report stressed that this is not likely to be a rerun of 2015. It was also noted that many of the filings this year were prepackaged plans made in collaboration with creditors—basically just needing a judge’s approval and supervision. Outright liquidations were expected to be few.
The unknown in the uptick in bankruptcies is the effect, if any, on liftings. Generally, production continues on existing wells. Most reorganizations mandate that normal operations continue. After all, creditors want cash flow. Spudding new wells is often suspended, and that may dial back production in the next year or two.
Midstream connections usually also carry on, especially build-ins. The status of buildouts depends on whether contracts have been signed. If so, that counts as continuing operations.
In the last big wave of producer bankruptcies there was also a raft of litigation by shippers—usually creditors or new investors—to change or vacate contracts with midstream companies. Results were varied and more recent contracts were usually drawn with new provisions in place for that eventuality, so there is not likely to be a similar flurry of lawsuits.
Check out the other "2019 Permian Playbook" chapters that appeared in the October issue of E&P magazine:
Producing Unconventional Wells without Electricity
The Concho acquisition gives ConocoPhillips about 700,000 net acres in the Permian Basin—more than quadruple the size of its previous position in the Permian.
Daniel Rice, former CEO of Rice Energy who now sits on the EQT board, addressed the elephant in the room earlier this month at Hart Energy’s Energy Capital Conference.
The combined company will operate under the name Devon Energy with a premium acreage position in the economic core of the Delaware Basin.