May 19, 2020

Feature: Uneven impacts expected as capex cuts trickle down to gas pipelines

Feature: Uneven impacts expected as capex cuts trickle down to gas pipelines



New York —
Billions of dollars in spending cuts by producers and pipeline operators likely will reshape what and when natural gas midstream infrastructure is developed over the next several years.

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But the deep capital expenditure cuts and broader energy market woes are likely to carry uneven ripple effects for interstate natural gas pipeline projects, according to a range of analysts.

“Our basic expectation at this point is that projects that have been approved [by the Federal Energy Regulatory Commission] will move forward, but that there may be less of an urgency to get them into service if they are supported by producers,” said Gary Kruse of LawIQ.

According to Kraig Grahmann, a partner at Haynes and Boone, the impact is likely to vary with the production region to which projects are tied. Those with midstream gas assets heavily focused on gas associated with oil drilling such as the Permian are more likely to suffer.

On the flip side, those with midstream assets tied to the Marcellus and Haynesville focused on gas or heavily weighted toward gas could see an uptick that could extend beyond the stay-at-home orders, as investors and lenders see oil as an extremely soft commodity, in his view. The gas-focused assets could see incremental increases in drilling, “not anything dramatic but enough to give nice little bump,” Grahmann said.

“Pipelines that are uncontracted and intended to carry associated gas from the Permian Basin … will likely sit on the back burner until the oil market recovers,” said Katie Bays of Sandhill Strategy.

For market participants, there is uncertainty about how many projects will be impacted, because while some companies are offering specifics for how their cuts will be distributed, others are not.

Kinder Morgan has approximately 10 major gas projects and expansions that have either received FERC certificate authorization to build over the last two years or are awaiting authorization.

The company is cutting spending on expansion projects and contributions to joint ventures across its portfolio for 2020 by approximately $700 million. It blamed market conditions resulting in a number of planned expansion projects no longer meeting its internal return threshold.

SPENDING CUTS, DEFERRALS

While company officials have declined to break the capex cuts down by project, they said that some $460 million of the spending cuts would impact natural gas investments, resulting in project removals or deferrals particularly on the gathering and processing side.

Still, in its latest financial results, Kinder Morgan indicated that the 328 MMcf/d Gulf Coast Southbound Project, which is supported by a long-term take-or-pay contract, is moving forward and is expected to be placed into service in the first half of 2021. The project is designed to feed Cheniere Energy’s LNG export terminal near Corpus Christi, Texas.

Canada’s TC Energy plans to be cautious with its spending, but at least two major US natural gas projects are advancing — the Alberta XPress project, an expansion of the ANR Pipeline system, and Buckeye Xpress, which will add 275 MMcf/d of incremental pipeline capacity to accommodate growing Appalachian production.

Another large player, Enbridge, has said it is deferring about $1 billion in capital spending into next year, with about half tied to permitting issues and half in coronavirus construction delays.

Michael Webber, managing partner of investment research firm Webber Research & Advisory, has argued that most projects are slipping even if developers are not yet talking about it. “In a sense, the pandemic may give some an excuse to delay or cancel projects that were headed that direction anyway,” he said.

The impact really depends on what the market thinks about the duration of the demand loss, said Rick Smead of RBN Energy.

“If it’s short and demand comes back soon enough to work off storage balances so that oil and gas prices can get back to reasonable levels pretty quickly, I wouldn’t expect it to have a material impact on the pipelines that are already committed for the next couple of years,” he said.


LNG DELAYS

Kruse notes that much could depend upon LNG demand, because most of the growth is heading to the Gulf Coast.

Multiple LNG projects are being delayed, and some may be in danger of being scrapped due to weak global market conditions exacerbated by the health crisis. Pipeline expansions linked to imperiled LNG projects may likewise be at risk.

On Monday, NextDecade delayed a final investment decision on its proposed Rio Grande LNG export facility in Brownsville, Texas. Sempra Energy has delayed FID on its proposed Port Arthur LNG facility in Texas to 2021, while Cheniere Energy suggested it may put off FID on its midscale liquefaction expansion at its facility near Corpus Christi until next year as well.

Tellurian said it was “very difficult to predict” when it will be able to take FID on its Driftwood LNG project in Louisiana. Meanwhile, Shell in late March pulled out of its Lake Charles LNG joint venture with Energy Transfer in Louisiana.

Elsewhere, Texas LNG, which like Rio Grande LNG is proposed for Brownsville, has delayed FID until 2021, while Annova LNG, a third export project proposed for Brownsville, is still targeting a 2020 FID.

CONTRACTS AS CUSHION

Still, some describe interstate gas pipeline projects, more broadly, as cushioned from the worst effects by their contracts with shippers.

“[W]e strongly believe that the global move to natural gas that we saw pre-pandemic will return as the economy recovers post-pandemic,” said Amy Conway of the Interstate Natural Gas Association of America.

Josh Price, Height senior analyst, said the legal issue of the court ruling vacating the US Army Corps of Engineers Nationwide Permit 12 program, more so than the broader market, is likely to adversely impact natural gas projects.

And permitting woes encouraged by environmentalists’ pushback continue to take a toll on the sector. Williams said it does not expect to refile for a permit from New York and New Jersey regulators for its Northeast Supply Expansion project after the most recent denials last week.

“Additionally, social distancing measures could impact construction timelines due to a reduction in crew size and other safety measures,” Price said.



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