Economic Pressure Coming Down the Pipe, Upstream Slowdown Begins Affecting Midstream

Researched by Industrial Info Resources (Sugar Land, Texas)--As oil prices show no sign of breaking over $60 per barrel, the midstream industry is beginning to sweat, as the pressure that has been on producers since the price drop now begins to work its way from upstream to midstream. A drop in new production in the Denver-Julesburg (DJ) basin has been named as the cause behind the recent combination of the 200,000 barrel-per-day (BBL/d) Saddlehorn pipeline by Magellan Midstream Partners (NYSE:MMP) (Tulsa, Oklahoma) and the 130,000 BBL/d Grand Mesa pipeline project, which is owned by NGL Energy Partners LP (NYSE:NGL) (Tulsa, Oklahoma) and operated by Rimrock Midstream LLC (Plano, Texas).

As production has dropped, the need for new takeaway capacity has dropped proportionately. While this is not the first midstream project to feel the effects of the current low oil prices, it is one of the biggest, as it traverses two market regions.

The DJ Basin is a smaller play when compared with the prolific Eagle Ford, Permian or Bakken shale formations. Its crude is not as cheap to extract as are some of its Texas counterparts, and as such, is not exploited at as low of a price point. It is these types of plays, like DJ Basin or the Mississippian Lime, where smaller interconnectivity or gathering projects have been among the first affected. Small projects in smaller plays, such as the Western Line by Plains All American LP (NYSE:PAA) (Houston, Texas), which is a 30-mile 12-inch diameter pipeline in Oklahoma, or the 135-mile, 12-inch diameter, intrastate Uinta Express by Tesoro Corporation (NYSE:TSO) (San Antonio), have been canceled or put on hold due to the drop in crude oil prices.

Other major pipelines that have recently been delayed, canceled or put on hold, such as Plains' Diamond Pipeline, at first glance may seem to be falling prey to the same market conditions as Grand Mesa. However, further complicating matters for crude oil pipelines is the ever-present specter of regulatory permitting and its headaches, as is the case with Diamond. In this case, the delay of Diamond may prove fortuitous, as the 200,000 BBL/d line from Cushing to Memphis would have evenly balanced Saddlehorn's initial 200,000 BBL/d capacity into Cushing; but with decreasing production in the DJ Basin, the need for a counter to Saddlehorn's addition to Cushing decreases.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at www.industrialinfo.com.