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Hard Hat and a Hammer, Part 3 - Re-contracting Issues for Older Permian Crude Pipelines

Old age and treachery will always beat youth and exuberance. So the saying goes, and it often holds true for midstream projects as well as people. Many times we’ve written that existing pipe in the ground beats new pipeline projects; it’s frequently easier and faster to expand the capacity of an older pipe than it is to build an entirely new pipeline. But eventually, contracts on these old pipelines expire, and as they do, shippers may have new, more attractive options — maybe proposed new pipes offer better connections to gathering systems, the ability to segregate batches of crude oil, and/or access to more desirable markets. Most importantly, they probably are willing to charge a lower tariff. In the Permian, we’ve seen a slew of new pipelines advance to construction by promising lower and lower shipping costs to move crude from West Texas to the Gulf Coast. Today, we look at how older pipelines’ re-contracting efforts will be affected by their competitors’ lower tariffs and operational advantages.

Old pipelines aren’t sexy. They typically don’t have the 1-MMb/d capacity of some of the new, extra-large-diameter systems now being developed, they aren’t connected to all the important new gathering systems, and heck, they might even have some outdated scheduling system that requires the shipper to submit nominations via an Excel spreadsheet. (It’s funny — ask most schedulers, and they’ll tell you they still prefer spreadsheets over the new-fangled web portals.) But still, old pipes work. They can get crude from Midland to the Gulf Coast or Midland to Cushing for $4/bbl or so, day in, day out. Typically, the original contracts that shippers signed to move barrels were for seven to 10 years, occasionally shorter or longer. As we’ve written about in the past, signing a “take-or-pay” contract on a system for that long is a big commitment — it’s a lot like a marriage between the trader/marketing group and the pipeline. And when these systems offer expansion capacity to shippers — like BridgeTex or Midland-to-ECHO have done recently — there are often a few parties willing to extend the marriage. Those shippers trust the operations on the pipe, like the sales markets they can get to, and know it will get their barrels from Point A to Point B every month.

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