On Monday, Energy Transfer kept the deals coming with the $5.3 billion acquisition of Sunoco. This deal certainly launches ETP into the really big leagues, and makes it one of the most diversified players around. And if you read the fine print, they plan to get more diversified by converting gas lines into crude oil lines. The poster child is good ole Texoma pipeline, which was a crude pipe for years before it was converted sometime in the 80s to move natural gas. ETP CEO Kelcy Warren says he has his eye on a few other gas pipeline candidates for conversion. And don’t forget. Up in the Guernsey, WY area Kinder Morgan is converting 500 miles of the Kinder Morgan Interstate Gas Pipeline system into the Pony Express Crude oil pipeline. Hmm. Gas production is going strong in wet gas plays like western edge Marcellus and Eagle Ford, while at the same time production is declining in the dry gas plays like Haynesville. It seems like the big crude oil plays like Bakken, Permian, Eagle Ford, etc. all need more pipelines. Given the dislocation in gas production growth and the opportunities in crude markets, it certainly makes sense that conversion of pipelines should be high on the priority list for any self-respecting pipeliner.
So it makes you wonder. How does the math work? Natural gas is gas. Crude is liquid. How much does it cost to convert one of these things, and what are the operational and economic considerations for doing so? Obviously this is enough material for a college degree, much less a blog. But just for fun, let’s look at some of the numbers.
As you would expect, there is no single, easy back of the envelope calculation for the cost to convert a natural gas pipeline to crude oil/liquids service. And of course, the decision to make such a conversion must be based on both the costs of conversion and the cash flow of the pipe after conversion – which means you’ve got to have a sense for revenues and operating costs. But fortunately there are some secret, well-guarded rules of thumb that can be used to approximate some of these numbers. Pipeline engineers are sworn to secrecy at birth not to reveal these factors, lest other more lowly members of society (i.e., MBAs) might come to believe that they are not indispensable. But here at RBN, we think this kind of information should be disbursed to the masses, so that all the pipelines that should be converted - are converted. Not only does it better society by making our energy transportation system more efficient, it helps generate project consulting revenue for RBN!
We will call these the ‘Pipeline Rules of Thumb Calculations’ or PROTCs (pronounced protcies). Warning, stop reading here if you hate geometry and/or engineering.