Confusion in the midstream patch

CROSS THE STREAMS

MIDSTREAM • IF OPERATORS FOUND 2019 HARD TO DEAL WITH, 2020 IS ALREADY TURNING OUT TO BE SOMETHING ELSE ALTOGETHER

FOR INDEPENDENT OPERATORS in the North American midstream patch, 2019 turned out to be a rather mixed bag. While new export facilities and downstream investment took all the headlines, tightening margins hampered arbitrage opportunities across the continent. As a result, those with pipeline connections to the US Gulf largely did well, while those closer to domestic refining sponsors saw their volumes and revenues drop.

One operator at the wrong end of things, for instance, was Delek US Holdings, which saw full-year revenues drop from $10.23bn in 2018 to $9.30bn and operating income fall 20 per cent to $492.3m. The decline was attributed to a tighter crude oil price differential, partly offset by some investments that came onstream during 2019. It is now looking to trim its retail portfolio and invest further in pipeline infrastructure and other midstream assets.

Doing rather better last year was Enterprise Products Partners, one of those focusing on the expansion of export capacity for crude oil and liquefied gases in the Houston area. Net income for the year rose by 9 per cent to $4.6bn, with all business segments reporting increased results.

“During the fourth quarter, our engineering and operations team successfully completed construction and began commercial operations of expansion assets at our LPG marine terminal, the Mentone and Bulldog natural gas processing plants, the ethylene export terminal on the Houston Ship Channel and our isobutane dehydrogenation facility,” reports AJ ‘Jim’ Teague, CEO of Enterprise’s general partner, illustrating what the company sees as its strategic priorities.

This year may, though, turn out rather differently. In common with other businesses at all points in the liquids supply chain, the impact of the Covid-19 pandemic on commodity prices and end-user demand have thrown investment plans into chaos. Teague says the company is “currently reviewing its capital expenditure programme” and is in discussions with its customers to evaluate opportunities to reduce or defer investments.

PLAYING WITH THE BIG BOYS Also finding itself in the right place was NuStar Energy, which reported 2019 net income of $207m, up 41 per cent over the 2018 figure, and EBITDA from continuing operations up 12 per cent at $668m. “Last year was, by all measures, a great year for NuStar,” says president/CEO Brad Barron. “Our results, across the board, demonstrate how well our employees executed on our 2019 plan.”

NuStar notes that throughput volumes at its storage terminals increased by 36 per cent last year; its west coast terminals “executed on projects to develop the renewable fuels logistics network necessary for regional markets to achieve low-carbon fuel targets” while the St James facility in Louisiana more than doubled unit train activity after new pipeline connections opened.

In particular, Barron points to increased throughput on both its Permian Crude System and its Corpus Christi Crude System, with volumes handled at the Corpus Christi export

terminal more than doubling over the course of the year.

Magellan Midstream Partners is another major operator that has been expanding export handling capacity in the Houston area, and ended 2019 with transportation and terminals revenue of $1.97bn, up on the $1.88bn posted in 2018. Product sales revenues dropped, however, indicating the weakness noted in oil prices. Nonetheless, overall operating profit edged up slightly to $1.20bn.

“Magellan closed out the year with another strong quarter, generating solid financial results from each of our segments and solidifying 2019 as a record year for our company,” says CEO Michael Mears. “Our conservative business model has consistently proven successful as we focus on providing essential services to move the fuel that keeps America moving while ensuring attractive returns on capital deployed.”

Magellan’s marine storage division delivered an operating margin of $133.7m, up 13.4 per cent year-on-year. Expansion work during 2019 focused on the 4m-bbl jointventure Pasadena facility, which is expected to be fully in service shortly, and the Seabrook terminal, where 800,000 bbl of new tank storage recently came into service; Magellan is adding new dock capabilities this year and another 750,000 bbl of tankage is due to be completed early in 2021. In the meantime, Magellan is looking to close the projected sale of three marine terminals in Connecticut, Delaware and Louisiana shortly.

OUT OF THE WINDOW But, by the end of the first quarter of 2020, all those good intentions may have to be tossed away. It is not just the impact of the Coronavirus pandemic – there is simply too much oil in the market. The new output arriving on the world market from the US has until now been soaked up by strong demand but, spooked by weakening consumption patterns and the inability of the Organisation of the Petroleum Exporting Countries (Opec) to rein in production, crude oil prices have plummeted to levels not seen since 2002.

The evidence has been clear to see from the example of China, where the disease first emerged. Consultants are now expecting oil demand in China this year to be flat compared to 2019, with a similar effect elsewhere in Asia. Refiners do not yet seem to have reacted in full to the slump in demand for road, aviation and bunker fuels, although that is coming. In the meantime, surplus crude oil and refined products are heading into storage – with consultant Rystad Energy predicting that global storage capacity could be effectively ‘full’ within months. That process is being accelerated by the US administration’s announcement that it will be taking advantage of low prices to put more strategic reserves aside.

That is not necessarily bad news for terminal operators: at least they will be earning money from their full tanks, even if they are not picking up throughput revenues. But what it does do is throw into questions investment plans. Operators may be tempted to focus on the short-term market reality and reap the benefits, although of course it does take time to put the necessary capacity and capabilities into place; on the other hand, if this crisis passes quickly, they may find themselves left with capacity that cannot be filled, or spare capacity in the wrong place.

Opec has another opportunity to toughen its production limits, but then again it is also seeking to protect its market share from the US and Russia so it may not feel able to take a strong position. What seems likely is that we will have a much better idea about how the North American midstream operators are going to play this market once their firstquarter figures start to emerge in a few weeks. What is clear is that, for the rest of the year, it will be a very long way from business as usual.

PIPELINE CONNECTIVITY IS CRUCIAL FOR MIDSTREAM

OPERATORS LOOKING TO MOVE ALL MANNER OF

LIQUID AND LIQUEFIED PRODUCT TO MARKET,

WHETHER THAT IS WITHIN NORTH AMERICA OR,

AS IT INCREASINGLY IS, OVERSEAS