January 7, 2019 [Seeking Alpha] - Enbridge, Inc. and Enterprise Products Partners L.P. each own half of the Seaway Pipeline. Going over the major changes at the Seaway Pipeline since 2011. The Seaway Pipeline has the capacity to move 850,000 bpd of crude from Cushing, Oklahoma, down to Freeport, Texas.
Covering the economic rationale behind the major developments at the Seaway Pipeline over the past decade. Another expansion project is in the works with an open season currently underway.
Enbridge, Inc. (NYSE:ENB) and Enterprise Products Partners L.P. (NYSE:EPD) each own half of the Seaway Pipeline, which has the capacity to haul 850,000 barrels of crude per day from the Cushing oil hub in Oklahoma down to the port city of Freeport in Texas.
From there, transported volumes along the Seaway Pipeline can reach marine terminals for export, domestic refineries and petrochemical complexes, regional distribution networks, and storage facilities.
The Seaway Pipeline owns the Jones Creek terminal near Freeport along with two storage terminals at Enterprise Products Partners L.P.’s ECHO terminal.
As a staple of America’s oil industry, it is worth noting how Enbridge and Enterprise Products Partners L.P. were able to salvage the pipeline from the grips of irrelevancy, and what the joint venture has in store for this asset going forward. Let’s dig in.
The Seaway Pipeline commenced operations back in 1995, and its original purpose was to route crude from the US Gulf Coast region up to the Cushing hub. Oil imports into the Gulf region could then reach refineries in the Mid-Continent, Midwest and South regions of America after transiting through Cushing.
As the ongoing US energy boom got underway, there no longer was any real need to move barrels from the Gulf Coast to Cushing (especially as things stand today). Crude in the US Gulf Coast trades at a premium to Cushing supplies, making it uneconomical to ship imported oil from overseas markets all the way to Cushing under most circumstances.
ConocoPhillips (NYSE:COP) sold its 50% stake in Seaway Crude Pipeline Company to a subsidiary of Enbridge back in late-2011. In conjunction with that announcement, Enbridge and Enterprise Products announced that they were moving forward with a reversal of the system.
By May 2012, crude barrels started flowing in the other direction. However, the pipeline initially had only 150,000 bpd of transportation capacity after the reversal project was completed. Adding pump stations and other modifications to the system through a major development that was completed in January 2013 boosted the Seaway Pipeline’s transportation capacity up to 400,000 bpd.
As the American oil boom showed no signs of stopping, that wasn’t enough. This prompted Enterprise Products and Enbridge to pursue a twinning of the pipeline, which means laying down a new pipeline parallel to the existing system. When that project was completed in July 2014, the Seaway Pipeline had the capacity to haul 850,000 barrels of crude per day from Cushing down to the US Gulf Coast region.
From Irrelevant to Backbone of American Oil Industry
Over the course of just three years, Enbridge and Enterprise had converted a pipeline sliding into irrelevancy into one of the most important oil pipelines in America. The pipeline was sliding into irrelevancy because Brent traded at a massive premium to WTI back in 2011, a premium that even touched $28/barrel at one point.
Why would a refinery, for instance, purchase foreign oil supplies at Brent-linked prices and send those crude volumes to Cushing via the Seaway Pipeline. Conversely, upstream operators would love to send oil from Cushing down to the Gulf Coast where the ability to fetch premium pricing makes the transportation costs well worth it.
Whether those barrels are light sweet or medium sour, reaching the Gulf Coast makes those volumes “immediately” more valuable. This is seen by the premium Louisiana Light Sweet supplies fetches over WTI concerning light sweet barrels, and the premium Mars supplies fetches over WTI concerning medium sour barrels.
At the end of 2017, the Seaway Crude Pipeline Company had a gross book value of 2.8 billion USD (split 50/50 between both entities on a net basis). Enbridge notes that its revenue and earnings from the system grew every year from 2015 to 2017. That was aided by the Seaway Crude Pipeline Company’s operating margin improving over this period.
Enterprise Products and Enbridge want to keep the momentum going by adding another 100,000 bpd of transportation capacity to the Seaway Pipeline. An ongoing open season is expected to be completed this January with the additional capacity becoming available by February 2019.
It appears likely that the venture will easily be able to secure long-term agreements covering that capacity due to the favorable economics of transporting Cushing oil supplies to the Gulf Coast for reasons previously mentioned.
Additional supplies to Cushing will arrive from North Dakota as Energy Transfer LP (NYSE:ET) gets ready to expand the takeaway capacity of the Bakken Pipeline (which consists of the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipeline) with a binding open season currently underway. Enbridge owns a large economic interest in the Bakken Pipeline, which currently has the capacity to ship 525,000 bpd along the DAPL part of the network.
The consortium wants to increase the system’s capacity to 575,000 bpd by modifying the pump stations supporting the pipeline and ensuring that most of that capacity is protected by long-term contracts.
Plains All American Pipeline L.P. (NYSE:PAA) brought the Sunrise oil pipeline extension online in November 2018, which is now routing 300,000-350,000 bpd of Permian oil to Cushing. At its peak, the development is expected to add 500,000 bpd of takeaway capacity out of the Permian Basin. Whether it is from the North or the West, the Cushing oil hub is set to receive a lot more crude supplies than it needs, which is why additional takeaway capacity is required.
Enbridge and Enterprise Products Partners L.P. made the right call in 2011 to move forward with the pipeline reversal project, and ever since then the growth opportunities and operational synergies have been superb.
Transporting additional oil volumes from Cushing to the US Gulf Coast creates new revenue generating opportunities for both midstream entities. For instance, Enterprise Products Partners L.P. can generate upside by leveraging its storage and export capabilities in the US Gulf Coast region and by expanding those capabilities (with an eye on VLCC-capable crude oil export terminals). For Enbridge Inc., the firm is ensuring that there is enough takeaway capacity to support and grow its Bakken Pipeline asset. Thanks for reading.
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