Turbulent conditions in the oil market are forcing pipeline companies to reduce their rates to incentivize shippers to use their systems, according to a Bloomberg report. Several are offering discounts or other incentive programs to existing customers to increase the volumes flowing through their Texas oil pipelines.
Kinder Morgan (NYSE:KMI) is reportedly offering discounts of up to 50% to some customers on its Eagle Ford Pipeline. Meanwhile, Magellan Midstream Partners (NYSE:MMP) is negotiating lower tariffs on its BridgeTex system for certain shippers. Energy Transfer (NYSE:ET) is also planning a volume incentive program to qualifying customers on its Permian Express 2 and 3 pipelines.
Driving these discounts is the significant decline in oil volumes this year as producers shut-in wells and halted their drilling program to combat the impact of COVID-19 on oil demand. That affected demand for pipeline capacity, which caused shipping rates to tumble. After starting the year above $3 a barrel, the cost to move oil from the Permian Basin to the Gulf Coast has recently plunged below $1 a barrel, which isn't enough to cover the transport costs.
The current market conditions are a significant reversal from two years ago when pipeline companies couldn't build new capacity fast enough to meet surging demand. Because of those conditions, companies like Magellan Midstream were cashing in on existing pipelines such as BridgeTex by selling uncontracted capacity on the spot market at a premium.
However, those volumes have dried up over the past year. Because of that, pipeline companies aren't finding takers for their available capacity, causing them to offer big discounts to keep existing ones filled. Meanwhile, the deteriorating conditions also led several pipeline operators to mothball proposed Permian oil pipeline projects over the past year.