Pipeline Builders Try New Growth Strategy: Bigger Pipes

FeaturesDow Jones Newswires

Some of North America's biggest new pipeline projects are already in the ground.

As environmentalists and local activists make it extraordinarily difficult to build new oil and gas lines, energy companies are working around the opposition by supersizing old pipes that already crisscross parts of the continent.

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Executives at some of the biggest pipeline operators in the U.S. and Canada, including Enbridge Inc. and Kinder Morgan Inc., say they pivoted to the strategy as plans for new pipelines came under attack.

For decades, new pipeline projects rarely drew attention, much less ire. "We used to just show up with a map," said Al Monaco, president and chief executive of Enbridge. "Now we engage with the local communities and indigenous groups early and often."

In recent years, groups with a goal of keeping fossil fuels in the ground have joined forces with Native American activists, landowners and other local opponents to stall numerous projects, Most notable among these was TransCanada Corp.'s much-debated Keystone XL pipeline.

Skipping new lines -- and the environmental reviews and taking of land by eminent domain that they often require -- and instead working under existing permits and rights of way is just common sense, pipeline executives say. Mr. Monaco said the expansions also minimize impacts to land and the environment in addition to being cheaper.

"Once the pipe is in the ground, you can do a lot of things: reverse flows, expand it, optimize it," he added.

Pipeline expansions may help explain why, despite the Trump administration's recent approval of the Keystone XL pipeline, Enbridge competitor TransCanada has yet to make a final decision about moving forward.

Enbridge is also pursuing a combination of other pipeline expansions that together could add another 800,000 barrels a day of capacity to bring Canadian crude south at a cost of just $1.3 billion. That is roughly the same volume Keystone XL would carry -- at a price tag more than 80% lower.

Further east, Enbridge is also supersizing its natural-gas network across the northeastern U.S. from the shale fields of Pennsylvania to Boston to Halifax, in Canada. Where there was once a 26-inch-diameter pipeline carrying shale gas into New England, there is now a new, 42-inch pipeline in a right of way the company secured by buying out rival pipeline operator Spectra Energy Corp. last year.

The pipeline expansion, which runs under New York state, happened despite concerns raised by state and federal elected officials.

Investors want cheaper and faster pipeline expansions because demand for moving fuel around North America is increasing, and companies' returns have fallen short of shareholder expectations.

Kinder Morgan had to abandon its $3.3 billion Northeast Energy Direct gas project in 2016 after environmentalists and elected officials opposed it and regulatory hurdles prevented the company from lining up funding. The route would have laid more than 400 miles of new gas pipes from Pennsylvania to New York and Massachusetts.

Instead, Kinder Morgan completed several expansion projects in the region last year, adding 532,000 million British thermal units of gas delivery. Enbridge forged ahead with two big expansions, digging up old pipes and replacing them with bigger lines to add 474,000 million Btu of capacity. Combined, the additions can power more than 5 million homes in the Northeast.

The supersizing strategy has obvious limitations. It is a boon to companies with assets in the right places, boosting their value, but of little use to those without. Some parts of the country simply need more pipelines, including areas that didn't previously produce much oil and gas where fracking has unlocked new supplies.

And expansions haven't eliminated gas shortages, at least in New England. This year's winter weather has been so frigid that heating demand spiked and caused wholesale gas prices in Boston to soar to more than $400 per million Btus during some peak hours. By comparison, the benchmark U.S. gas price at the time in Louisiana was less than $3 per million Btus.

Expansion projects aren't limited to the Northeast or natural gas. From North Dakota to Texas, some companies are shying away from building new oil pipelines in favor of goosing the volumes they can push through aging ones.

A consortium headed by Marathon Petroleum Corp. has floated a plan to reverse the flow of crude oil on one of America's biggest pipelines. For several decades, the Capline system carried oil pumped in the Gulf of Mexico and foreign crude imported via Louisiana north to refineries in Midwest. The amount of oil moving through the line has dwindled as U.S. frackers have drilled more and imported less.

If enough customers sign up for space on the reversed Capline, the pipe could start transporting U.S. and Canadian crude from an Illinois storage hub south to fuel factories and export docks along the Gulf Coast by 2022.

Getting creative with old pipes makes economic sense, even if building brand new ones might be safer, said Justin Carlson, managing director at East Daley Capital Advisors. After years of taking on heavy debt loads to pay for new pipes, investors want companies to shun high borrowing costs and live within their means.

"This is a market that is been beaten up," he said. "Quite frankly it's not cheap to build new stuff."

Pipeline expansions often come with controversy. Pennsylvania regulators halted construction of Energy Transfer Partners L.P.'s Mariner East 2 expansion earlier this month amid stiff local resistance.

Plans for the bigger line call for shipping more natural gas byproducts to an export facility outside Philadelphia. Part of the fight against the project centers on where the fuel is going -- overseas instead of to help satisfy U.S. demand. But some arguments against expansion projects are the same as those against new pipelines, from the need to wean America off fossil fuels to perceived threats to water quality.

Energy Transfer is having success with another big revamp on its Trunk line and Panhandle pipelines to send natural gas from huge deposits in Pennsylvania and Ohio to the Gulf Coast. The expansion will cost $51 million and nearly pay for itself in the first year, generating around $43 million annually, according to one analyst's estimates.

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Lynn Cook at lynn.cook@wsj.com

(END) Dow Jones Newswires

January 17, 2018 12:56 ET (17:56 GMT)

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