With surging crude oil production in the Permian Basin reaching the limits of the pipeline system, pipeline companies are working to build new capacity to avoid bottlenecks that could restrict exports out of the area.
But the Trump administration upset the economics of planned projects when the Commerce Dept. in mid-July rejected a request by Plains All American Pipeline for an exemption from a 25% tariff on imported steel for its Cactus II project.
“Uncertainty is the difficult part of this whole thing,” says Ed Wiegele, president of TRC’s oil and gas sector. “It introduces risks into a project that have to be addressed [and] can slow things down.”
The steel tariff makes it tough to calculate how much projects will cost, making it unclear what the returns on a project might be and possibly slowing down pipeline customer commitments, according to Wiegele. Generally, steel accounts for 30% to 40% of a pipeline project’s total cost, he says.
Increasing the cost of imported steel pipe, fittings and valves by 25% would boost costs for oil pipelines by 3.1% and natural gas pipelines by 3.3%, according to a report released last year by oil and natural gas trade groups.
The action on the steel tariff comes as crude oil production in the Permian Basin, which covers parts of West Texas and eastern New Mexico, is expected to jump to about 6.4 million barrels per day by 2023, up from about 3.5 million bpd this year, according to Houston-based Plains. Existing pipelines can export about 3.2 bpd from the area.
In response to the pipeline capacity crunch, three major projects are slated to start operating by late next year, delivering oil to the Corpus Christi area on the Gulf Coast. They include Plains’ $1.1-billion, 670,000-bpd Cactus II project, Phillips 66 and Andeavors’ $2-billion, 800,000-bpd Gray Oak project and EPIC Midstream Holdings’ 550,000-bpd EPIC pipeline. The Gray Oak and EPIC projects could be expanded, depending on shipper interest.
Some companies also plan to expand existing pipelines. Plains is investing about $1.8 billion this year and in 2019 to expand takeaway capacity out of the Permian Basin. The company’s projects include the El Mar-to-Wink “debottlenecking” project that aims to eliminate pipeline congestion within the Permian Basin to increase access to long-haul pipelines.
The company is seeking tariff exemptions for that project. Plains will receive pipeline in August from a German mill that was the only facility able to meet its schedule, according to its “exclusion” request with the Commerce Dept.
Kinder Morgan also wants a tariff waiver for its $1.75-billion Gulf Coast Express pipeline, which would deliver about 2 Bcf/d of natural gas out of the Permian Basin to the Texas coast. The project will use about $500 million in Turkish steel, according to the company.
Plains is moving ahead with the Cactus II project despite failing to get a tariff waiver, Willie Chiang, Plains executive vice president said July 24 during a hearing of a House Ways and Means subcommittee. The project will cost an additional $40 million because of the tariff, he said.
“The bigger concern for us is the forward motion on tariff/quotas,” Chiang told the trade subcommittee. “Those impact the decision making process for all projects and the critical nature of this is the trajectory of our energy improvements in production growth is jeopardized.”
The steel tariffs can affect oil and natural gas production, pipelines and refineries, according to Chiang. “The concern we’ve got is any delays on project decisions could delay production growth, and our industry is all intertwined,” he said.
Plains is trying to take a “very targeted approach” on upcoming projects to try to get some certainty on deliveries, quotas and tariffs, Chiang said.
Wiegele expects that once there is clarity on how the tariffs and the exemption process works, things will settle down. “Once we figure it out and can take uncertainty out of these projects, the industry can progress them to a final investment decision,” he says.