conversion

The proposed $2 Billion Kinder Morgan Freedom pipeline project is conducting an open season for shipper commitments from West Texas to California. The California refining market has long operated like an island within the US and has so far received few supplies from new domestic production. To proceed with the project Kinder need shippers to make long term commitments but today’s unsettled markets place a premium on flexibility. Today we conclude our two-part analysis of the chances that the pipeline will get built.

The latest Energy Information Administration (EIA) April 2013 short term energy outlook forecasts US crude oil production to increase from an average of 6.5 MMb/d in 2012 to 7.9 MMb/d in 2014. Surging crude production needs to find routes to market – and often competes for pipeline space with growing Canadian imports. New crude pipelines are taking too long to build. At the same time many natural gas pipelines are flowing far beneath capacity because new gas production nearer to market makes them redundant. Converting these natural gas pipelines to crude oil use where geography allows is a potential win-win. Today we look at gas to crude pipeline conversion economics.

For the past two days we’ve slogged through the math of converting natural gas pipelines to crude oil service.  Whether or not you spent the time to follow the details, you might have wondered – What’s the point?  Some pipelines are candidates for conversion, some are not – right?  It just depends on the classic real estate rule --- location-location-location.  Well there may be more to it than that.  A lot more.  What if I told you that a typical liquids pipeline can generate four times the revenue of a gas pipeline of equivalent diameter and length.  The crude pipe can move four times the energy.  And clearly, four times the energy and four times the revenue leads to four times the fun of running and operating a pipeline.  Right now a lot of gas pipelines are not having much fun.  On the other hand, it is party time at most crude oil pipelines.  Bust out the red solo cups.  Let’s figure out just how much fun they are having.

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.