US crude pipelines lower rates amid competition

US crude pipelines that move oil to the Gulf coast are making significant cuts to spot tariffs, reflecting greater competition and narrowing price spreads.

Energy Transfer has proposed to drop some October spot rates on its 200,000 b/d Permian Express 2 pipeline to $1.50/bl-$1.55/bl to move crude from Colorado City and Garden City in Texas to Nederland and Sour Lake. Those rates are down from a range of about $3.37/bl-$4.33/bl in a tariff that went into effect in July, according to filings with the Federal Energy Regulatory Commission.

This comes on the heels of midstream operator Epic cutting the spot tariff on its 400,000 b/d crude line to $1.35/bl for flows from Crane, Midland and Wink in west Texas to the Corpus Christi area. Epic had previously cut the rate to $2.50/bl from $5/bl. Epic started delivering crude on the line last month.

Another large crude line, Plains All American Pipeline's 670,000 b/d Cactus 2 line, also went into service last month moving Permian oil to Corpus Christi.

TC Energy lowered its spot crude rates for September on the 800,000 b/d Marketlink pipeline from Cushing, Oklahoma, to Houston and Port Arthur in Texas, citing competition from the new Permian lines. The new Marketlink spot rate from Cushing to Houston or Cushing to Port Arthur is $2.25/bl for light crude, down from $3/bl. The spot rate for heavy crude on the same routes is $2.70/bl, down from $3.60/bl.

Another Cushing-to-Houston system, the 950,000 b/d Seaway crude pipeline also dropped its spot rates from a range of $4-$5.25/bl to $3.10-$3.64/bl.

Magellan Midstream Partners said it expects spot shipments on its two Permian-to-Houston pipelines to dry up after the third quarter amid the new pipeline capacity.

The lowering of pipeline tariff rates is almost certainly the result of a battle for shippers out of the Permian as well as from Cushing to Houston, said director of research, energy and commodities at Morningstar Sandy Fielden.

New Permian pipelines are not going to run full overnight because of a sudden surge in production, he said. But the new lines want to secure shippers and fill up capacity. As a result, they are reducing tariffs to gain market share — competing not just against other new pipelines but also against legacy pipelines that charge higher rates, Fielden said.

The lower spot pipeline prices come as the spread between crude at Midland in west Texas and crude at the US Gulf coast has narrowed significantly with the new takeaway capacity.

The WTI Midland price discount to WTI Houston is averaging about $2.20/bl for the October trade month-to-date, according to Argus data. This compares to an average discount of $3.56/bl for the September trade month and an average discount of $5.16/bl for the August trade month. The spread peaked above $20/bl in October 2018.

The competition for market share should increase with more pipelines on the horizon. The 900,000 b/d Gray Oak pipeline is expected to start service by the end of 2019 moving Permian and Eagle Ford crude to the Gulf coast. In addition, Epic's larger Permian crude project is expected to start service in the first quarter of 2020 with an initial capacity of 600,000 b/d.

Other new Permian lines are also planned within the next two years including a 1mn-1.5mn b/d ExxonMobil-led joint venture dubbed the Wink-to-Webster pipeline which will move crude from west Texas to the Houston area. Enterprise Products Partners is also planning another Midland-to-Houston line that will move 450,000 b/d.

Final investment decisions on future projects are going to depend on signing up enough term shippers at a high enough tariff, Fielden said.

"If the market won't bear that economic tariff then projects could be delayed, abandoned or consolidated," he said.