June 27–Already preparing to spend $1.75 billion on the Gulf Coast Express pipeline, Kinder Morgan is proposing to spend another $2 billion on the Permian Highway Pipeline project taking Permian Basin natural gas to various points along the Gulf Coast.
While the Gulf Coast Express is in partnership with DCP Midstream and Targa Resources, the Permian Highway Pipeline project would be in partnership with Midland-based EagleClaw Midstream and Apache Corp. The three companies have signed a letter of intent to develop the project, which would transport up to 2 billion cubic feet per day. The pipeline is expected to be in service in late 2020.
EagleClaw and Kinder Morgan’s subsidiary, Kinder Morgan Texas Pipeline LLC, will each have 50 percent ownership. Apache and EagleClaw will be significant shippers on the pipeline, with Apache planning to commit up to 500,000 dekatherms per day. Apache will have the option to acquire up to 33 percent equity in the project from Kinder Morgan and EagleClaw.
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The project is designed to utilize a 42-inch pipeline stretching about 430 miles from Waha to Gulf Coast and Mexico markets. Kinder Morgan reports that, given the level of producer inquiry, the company is evaluating the economic and hydraulic feasibility of a 48-inch pipeline to increase transportation capacity.
“We have Permian Basin producers and midstream operators talking to us in excess of the 2 billion cubic feet of capacity. These potential customers clearly see the need for additional natural gas takeaway capacity,” Melissa Ruiz, director, corporate communications at Kinder Morgan told the Reporter-Telegram by email.
She said her company expects continued rising demand from numerous liquefied natural facilities, the broader Gulf Coast industrial and power generation demand centers and Mexico.
“Connectivity from the Waha market area to these outlets is essential to meet this demand,” she said in explaining the company’s decision to invest billions in new pipeline infrastructure.
“Natural gas has always been a focus for Kinder Morgan,” Ruiz said. “The natural gas segment is the largest segment in our portfolio of assets and there is tremendous growth in demand for natural gas both in the U.S. and beyond.”
Jamie Welch, EagleClaw’s president and chief financial officer, said in a phone interview from New York that the company’s management had been watching Kinder Morgan’s Gulf Coast Express project as it took shape.
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“We decided we wanted to be part of the next pipeline,” he said.
What attracted the company to Permian Highway was the plan to deliver natural gas from the Permian Basin into various markets: the Katy market hub, the Agua Dulce market hub, the Coastal Bend and Kinder Morgan Tejas headers connected to the Freeport LNG export facility, the Cheniere header connected to the Cheniere Corpus Christi LNG export facility and numerous pipelines along the Texas Gulf Coast.
Bob Milam, EagleClaw’s chief executive officer, said, the flexibility it offers producers is “the key of why we decided to participate.”
Welch said it “was the right way to go. This made sense from a routing standpoint and with credible developers, we brought the right commercial support.”
Apache and its Alpine High play “sit right at our doorstep,” Welch said.
And since that play skews more natural gas than crude, that helped convince the company the Permian Highway was the right project, he said.
Brian Freed, Apache’s senior vice president, midstream and marketing, told the Reporter-Telegram by email that his company is a significant acreage-holder in the Permian Basin, with 1.6 million acres.
“(H)aving the capacity to move large amounts of gas provides a benefit across the basin for Apache, at Alpine High as well as for the rest of our broader Permian position, for many years to come,” he said.
“We talked with our customers, who said they recognize they need to get out of Waha, they need to go places with maximum demand and premium pricing,” Welch said.
Given the fact there is only so much demand nationwide for hydrocarbons, Welch said it’s important to develop alternative markets, whether it’s Mexico for natural gas and refined products or Europe and Asia for liquefied natural gas.
Much attention is being paid to the pipeline constraints that are making it difficult for Permian Basin producers to move their crude production to market.
Freed said Apache has been proactively managing its sales to match production forecasts in order to stay ahead of the issue.
“Our primary approach has been to secure firm space with counterparties through firm sales contracts, which, along with other large commitments, gives us flexibility and allows us to sell into various end markets,” he said.
Among its commitments for pending pipelines are the Gulf Coast Express, Enterprise Product Partners’ Shin Oak NGL pipeline, EPIC’s crude oil pipeline and the Salt Creek Midstream NGL header.
Welch cautioned that natural gas producers could find themselves in similar constraints.
“You have to be on the front foot,” he said. “We talk to our customers, they see the need and are very supportive of someone like us taking proactive action.”
Given the rise in drilling activity and the geopolitical climate, “everyone seems to believe it’s unlikely we’ll return to $25 West Texas Intermediate any time in the foreseeable future,” said Welch. Crude prices at $50 or $60 “gives a rate of return on wells, particularly Delaware wells that are so attractive, so large, we need to satisfy the crude transportation needs but we also need to satisfy natural gas transportation needs or flare it.”
Milam said natural gas is moving to market “but at a tremendous discount.” He estimated that discount at about $1 per Mcf and said the Permian Highway project could cut that in half.
The project, coming almost exactly a year to the day EagleClaw was sold to Blackstone Energy Partners for about $2 billion, “is a big step,” Milam said. Having the financial resources of Blackstone available has opened the door to such opportunities, he said.
“This project truly changes our peer group,” he said.
Milam said the company may be celebrating this project, but it isn’t stopping there. From acquisitions to large greenfield construction and expansion, “We have a salad plate full of projects. This is a busy time for us.”
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