At the Wellhead: Trend continuing to make natural gas pipelines into crude oil carriers

As projections for US production of crude continue to far outstrip the capacity and location of the existing US crude oil pipeline system, and some natural gas carriers finding far less demand for their services, turning one into another seems to be the obvious choice. In this week’s Oilgram News column At the Wellhead, Bridget Hunsucker looks at some of the changes now under scrutiny.

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Some natural gas pipeline owners believe they have discovered a recipe for revenue — by mixing booming crude production with underutilized infrastructure. But converting existing pipelines to oil service requires one part coincidence and one part resourcefulness.

“With natural gas supplies growing in numerous regions from shale plays such as the Marcellus, gas pipelines delivering along historical routes into these regions are becoming underutilized, providing options for conversion to transport crude oil,” according to JP Morgan analysts.

Kinder Morgan, Energy Transfer Partners and TransCanada are all mulling plans to converting pipelines.

“On the natural gas pipeline system the flows have shifted and, coincidentally, have [done so] on quarters where there is a need to transport liquids,” said Don Santa, president and CEO of the Interstate Natural Gas Association of America.

It’s practical for companies to repurpose their own pipelines, sources say.

“The Keystone Pipeline approval has been so painful that the ability to convert something in the ground that already has right-of-way approvals is exceedingly appealing,” said Ken Beckman, an energy analyst with International Gas Consulting. “We are increasing oil production around the country. There is a tremendous amount of optimization [expected].”

TransCanada said it expects to make a decision in early 2013 on converting part of its natural gas Mainline to deliver western Canadian and light sweet Bakken crude from North Dakota to refineries in East Canada and the US. The pipeline originates in Alberta, an area that has “suffered” from natural gas production declines, Beckman said.

“Alberta [natural gas] production is declining as US production in the Marcellus and Bakken [shales] continue to absorb demand that has traditionally been served by Alberta supply,” said Bentek Energy analyst Andy Tillotson. Bentek is a unit of Platts.

At the same time, Alberta oil sands crude production is outpacing takeaway capacity. The Canadian Association of Petroleum producers expect oil sands to produce more than double 2011 levels to reach 2.3 million b/d in 2015, according to a report.

Additionally, refiners on Canada’s East Coast are looking for access to US crude, like Bakken, because of the WTI-Brent spread, said Peter Boag, president of the Canadian Fuels Association.

And, growing Bakken production needs a home.

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North Dakota’s crude oil production in August crossed the 700,000 b/d mark for the first time in the state’s history, according to state government data. Bakken crude production in August made up 90.5% of North Dakota’s total output.

The light sweet shale crude will likely ship on the Pony Express Pipeline after owner Kinder Morgan converts the pipeline from natural gas to crude, sources say. An open season was completed for the pipeline for deliveries of about 230,000 b/d of crude, starting in the third quarter of 2014.

The Pony Express originates in Wyoming and runs to Oklahoma, where there is currently a glut of crude supply and limited takeaway capacity.

“It is problematic where the crude goes once it gets to Cushing [because] within two years or so Cushing and points south will be awash in similar light sweet crude,” including those from the Permian Basin and Eagle Ford shale, said Turner Mason and Company analyst John Auers.

Energy Transfer Partners hopes to relieve that bottleneck by reversing and converting its Trunkline natural gas line into crude service. Once reversed the converted crude pipeline would run south from the Upper Midwest to the destination markets along the Gulf Coast.

“Trunkline has had low [natural gas] load factors for a while now,” Beckman said.

Lastly, Kinder Morgan is in the early stages of considering a plan to convert a portion of its EL Paso Natural Gas pipeline system to carry crude oil from the Permian Basin in Texas to Southern California.

“The volume could very substantial, maybe 300,000 or 400,000 barrels a day on that project,” said Richard Kinder, Kinder Morgan’s CEO, in an earnings call last month.

Analysts told Platts that the abundant West Texas crude would be a perfect fit for refineries in Southern California. For about a year, Permian Basin production has outpaced available take-away capacity from the region, sources say.

“The approval and conversion of the Mainline, Trunkline, EPNG and Pony Express could take two or three years, or perhaps longer before crude oil begins flowing,” according to the Kinder Morgan report.

“Nonetheless, the conversion of existing assets could further improve North American logistics and drive down marginal costs in the future.”

Beckman said that as long as there are oil and gas shale discoveries, infrastructure will shift.

“We have always managed to underestimate our natural resources in this country,” he said.

–Bridget Hunsucker in Houston


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