Houston, 18 October (Argus) — “A number of people” are interested in a Kinder Morgan proposal to transport a potential 300,000-400,000 b/d of Permian basin crude production west to California by converting an existing natural gas pipeline system, the company told investors this week.
“That's very speculative at this point, but there are a lot of opportunities. It could be very exciting there,” Kinder Morgan chief executive Richard Kinder said during the company's quarterly earnings call.
Such a move would involve converting its 10,200-mile El Paso system that moves natural gas from the San Juan, Permian and Anadarko basins to California. That system also delivers to Arizona, New Mexico, Oklahoma, Texas and northern Mexico. The crude line project would not involve the conversion of the entire system, Kinder said.
“We would still, if we did it all, be able to service all of our gas customers at the present level of demand or whatever throughput they want to sign up for – we have multiple lines across there – and still convert the line all the way from the Permian into southern California,” Kinder said.
“What we're seeing is there's continued increase in production in the Permian, particularly as these different sands are being exploited. And there's a lot of effort on a lot of people's parts to move this over at Houston, and we're certainly looking at some opportunities there, too. But we think there's also – given the dichotomy in prices between California and Texas – there's certainly some real interest at the right price under the right conditions to move oil to the west. And we're certainly going to look at that as a possibility.”
The opportunity to “collect capital” on such a project could be up to $2bn, Kinder said, adding that the company was in the early stages of the proposal but had talked to potential shippers who were “very enthusiastic.”
Plains All American Pipeline's chief executive, Greg Armstrong, earlier this week expressed skepticism over converting a pipeline to move Permian crude west. The 1,088-mile All American pipeline, which Armstrong's company used to own and sold to El Paso in 2000, at one time moved crude from California to Texas. It was then converted to move natural gas from east to west once it was sold to El Paso Energy. Kinder Morgan recently bought El Paso.
“We're of the view that it's probably going to be very difficult to put something like that back into service,” Armstrong said of converting the line back to crude service. “That was a 30-inch line. The line fill alone on that it took 5mn bl of product to put into the system just so when you push a barrel in, you get a barrel out.”
Armstrong also said the geography of a reversal would be challenging.
“To pump it uphill over mountains and down over the other side – it's probably a billion-dollar investment. The tariffs you'd have to get probably makes it cheaper than rail,” but the pipeline owner would need to get long-term commitments from shippers, he said.
Proposals for new Permian pipelines so far have been for expansions of existing lines running to the US midcontinent crude hub in Cushing, Oklahoma, or for new lines into the Houston, Texas, area. But potential Permian pipelines west have been discussed before. Upstream independent Pioneer Natural Resources chief executive Scott Sheffield earlier this year said an oil pipeline between Texas and California was needed as a relief for the region's burgeoning crude volumes.
Other midstream players have also considered converting natural gas pipelines into crude service as new technology and high oil prices have spurred more onshore drilling in liquid-rich shales amid depressed natural gas prices and output. Energy Transfer Partners has proposed an Illinois-to-Louisiana crude pipeline that would use part of an existing natural gas pipeline it wants to abandon and convert. And TransCanada is considering repurposing natural gas pipelines into crude use to move oil output from western Canada to refineries on the east coast of that country.
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