The Battle for Barrels of Oil Flowing From the North Intensifies

Plains All American Pipeline is the latest midstream company working on a solution to improve the flow of oil from northern production basins.

Matthew DiLallo
Matthew DiLallo
Jul 10, 2019 at 6:06PM
Energy, Materials, and Utilities

Pipeline companies have spent the past few years trying to capture as many barrels flowing out of Texas' Permian Basin as possible to ease that region's capacity issues. However, with midstream companies like Plains All American Pipelines (NYSE:PAA) constructing new oil transportation capacity as fast as they can, the region's pipeline building boom has hit a speed bump. That's leading pipeline companies to look elsewhere to fuel their next phase of growth.

Several have chosen to tackle the need for additional pipeline takeaway capacity out of northern production basins such as Western Canada, the Bakken shale, and the Rockies. However, as they did in Texas, pipeline companies are working on more expansions than producers currently need, which will cause them to either overbuild or cancel projects.

Two groups in a tug-of-war with the sun setting in the background.

Image source: Getty Images.

Opening the Western Corridor

Plains All American Pipeline is the latest midstream company to pitch an expansion project aimed at increasing the flow of oil from north to south. The MLP recently launched an open season to secure shippers to expand the capacity of its Western Corridor Pipeline System. Customers that sign up would be able to transport oil from northern Montana to markets along the U.S. Gulf Coast. If the company gets enough commitments, it could expand that system by up to an additional 70,000 barrels per day, which could be in service by the second quarter of 2021.

In addition to the Western Corridor Pipeline System, Plains All American is also looking to expand its Rangeland Pipeline from Edmonton to the U.S. border. That project would double the system's oil transportation capacity.

The oil from these two systems could then flow into the Red Oak Pipeline, which Plains All American is building with refining giant Phillips 66 (NYSE:PSX). That system, which will cost $2.5 billion, would transport oil from the Permian Basin and a major storage hub in Oklahoma to refining and export markets along the Texas Gulf Coast. This project is on track to start up by the first quarter of 2021.

If Plains All American Pipeline is successful in securing shippers for both the Rangeland and Western Corridor expansions, the company would be able to move more oil from Western Canada, the Bakken Shale, and the Rockies to the U.S. Gulf Coast.

A stack of pipelines with a blue sky in the background.

Image source: Getty Images.

Add it to the list

This proposed oil pipeline expansion project by Plains All American is just the latest one currently in development by the industry to move barrels from production regions in the north to demand centers in the south. Phillips 66, for example, has already given its Liberty Pipeline the green light. The project, which is part of a joint venture with privately held Bridger Pipeline, would cost $1.6 billion and move oil from the Rockies and Bakken production areas to a storage hub in Oklahoma, where it could then flow farther south on Red Oak. The pipeline is on track to be in service by the first quarter of 2021.

Meanwhile, midstream giant Energy Transfer (NYSE:ET) is looking to significantly expand its controversial Bakken Pipeline system, which runs from North Dakota to the U.S. Gulf Coast. After many delays, Energy Transfer and its partners, which include an affiliate of Phillips 66, started service on the system in June of 2017 with an initial capacity of 470,000 BPD. Energy Transfer has since expanded it by 100,000 BPD due to the continued growth of the Bakken. However, it's now seeking shipper commitments to nearly double the size of this system to 1.1 million BPD. This project, which would include adding new pumping stations to push more oil through the existing pipes, could be in service by late 2020.

In addition to that project, natural gas pipeline giant Kinder Morgan (NYSE:KMI) teamed up with pipeline operator Tallgrass Energy (NYSE:TGE) on a joint venture to increase oil transportation capacity in the Rockies, Bakken, and Western Canada. This project would see Kinder Morgan convert two underutilized natural gas pipelines to oil service, while Tallgrass Energy would expand its Pony Express oil pipeline that flows from Wyoming to Oklahoma. The project would add an incremental 550,000 BPD of oil transportation capacity out of the Rockies and could be in service by the second half of next year. Further, it would receive oil from the Bakken via Kinder Morgan's Double H Pipeline -- which it's working on expanding -- as well as from Western Canada.

Finally, Canadian pipeline giant TC Energy (NYSE:TRP) continues to push forward with the highly controversial Keystone XL Pipeline that would transport oil from both Western Canada and the Bakken to the U.S. Gulf Coast. TC Energy had hoped to start construction on the 830,000-BPD pipeline this year, but continued opposition pushed back that timeline.

There aren't enough barrels for all these pipelines

While North American oil producers desperately need more oil transportation capacity to the U.S. Gulf Coast refining and export hub, midstream companies have proposed building more pipelines than the industry requires in the near term. So not all these projects will move forward due to either opposition or lack of shipper interest. That's why investors should keep an eye on which ones these companies eventually build. Those that can win enough support to move forward will be the ones growing their cash flow and dividends at a faster rate than those that lost out on this battle for oil flowing out of the north.