Enterprise cancels major Permian crude pipeline project

(Bloomberg) --Enterprise Products Partners LP became the first to abandon a major crude pipeline in the heart of America’s shale patch on Wednesday in what may be yet another sign that the pandemic-fueled rout in U.S. oil markets isn’t over.

With lockdowns across the nation eviscerating fuel demand, Enterprise shelved plans to add 450,000 barrels a day of capacity to a system that carries oil from Texas’s Permian basin to the U.S. Gulf Coast. It joins scores of oil explorers, contractors and pipeline giants that have slashed billions of dollars in investments amid a swelling supply glut that sent crude prices plummeting earlier this year.

Oil production in the Permian, America’s most prolific crude play, has fallen as much as 16%, and the number of rigs drilling for crude in the U.S. fell to the lowest level since 2005. It’s a stunning about-face for shale drillers, whose previously unbridled drilling turned the U.S. into the world’s largest crude supplier.

“This cancellation would be the first for a large crude pipe as a direct response to demand destruction from the pandemic,” said Elisabeth Murphy, ESAI Energy upstream analyst for North America.

But the loss of demand cannot only be blamed. Even before Covid-19, tight oil production growth had been declining with investors demanding higher dividends and spending discipline.

Supply has slumped enough to create a “vision that oil infrastructure is in surplus,” said Raoul LeBlanc, an analyst at IHS Markit Ltd. Infrastructure was set up to meet the needs for oil output and demand of about 100 million barrels a day globally, but that has declined to about 90 million barrels a day now, so another pipeline is not needed, he said.

The biggest shale explorers, including Diamondback Energy Inc. and Concho Resources Inc., have said earlier this year that they do not expect to boost production heading into 2021. EOG Resources Inc., America’s largest independent shale oil producer, said U.S. oil output will likely suffer years of declines and may never regain the peak achieved earlier this year.

Houston-based Enterprise said Wednesday in a statement that it amended accords with customers, allowing the company to use existing pipelines to support its crude oil transportation agreements. The cancellation will save about $800 million of capital expenditures through 2022. Enterprise expects to take an impairment charge related to the decision of approximately $45 million in the third quarter.

Cost savings “will accelerate Enterprise toward being discretionary free cash flow positive, which would give us the flexibility to reduce debt and return additional capital to our partners, including through buybacks,” Co-Chief Executive Officer Jim Teague said in the statement.

Still, even before the global outbreak, the Permian was headed for an overbuilding of capacity, Murphy said. Enterprise’s Midland-to-Echo 3 will add 450,000 barrels a day and the Wink-to-Webster project will add 1 million barrels. “There is no way production growth would have filled all the available pipelines and the new ones,” she said.

Prior to this project cancellation, at the onset of the outbreak in March, Phillips 66 deferred its Red Oak and Liberty crude pipelines projects while holding off on its final investment decision for its ACE pipeline.