Deepwater Oil Exports: Enterprise Products Partners, Energy Transfer Lead
Contributor since 2014 / 19169 Followers
Summary:
- Offshore crude oil terminals along the Gulf Coast are crucial for North American crude production and exports, impacting existing methods and future outlook.
- Expense and regulatory hurdles have slowed progress in completing these projects.
- SPOT and Blue Marlin are the most likely winners in the race to build offshore terminals, with potential impacts on midstream flows and existing infrastructure.
Bjoern Wylezich
I’ve talked more about the outlook and progress on the prospective offshore crude oil terminals along the Gulf Coast than perhaps any other suite of potential projects over the past few years. While the crude oil market has changed drastically in my time covering energy here on Seeking Alpha – the OPEC/shale market battle, pandemic demand construction, industry consolidation, geopolitical conflict in Ukraine and the Middle East – the interest in getting these deepwater facilities online since the crude export ban was lifted has never faltered. That shows how important they are, and forecasting their success or failure will impact not only the outlook on existing methods of export but also North American crude production as a whole. This could have ramifications elsewhere as well, alleviating congested ship channels which potentially aids other exports such as natural gas liquids, refined products, and ammonia.
So why is the only offshore terminal online right now the Louisiana Offshore Oil Port (“LOOP”), an asset that was completed more than forty years ago and only exported its first load of crude back in 2018? What has been keeping these projects from getting completed? I’ll opine on those concepts a bit, but I want to zero in on exactly what these projects mean for crude oil flows on the midstream side in particular.
Expense, Regulatory Headaches
Number one, these things are expensive. When even the massive companies involved in the four main projects (more on each one later) are talking about bringing in joint venture partners and selling equity stakes, it’s clear we’re talking about significant costs that will total in the billions of dollars. That kind of outlay, just like liquefied natural gas (“LNG”) terminals, necessitates longer-term contracts from customers that the deepwater port owner is comfortable will be around for the tenure of the contract. There is elevated risk on both sides of the deal when it comes to negotiating terminalling rates, and I think that’s been a big reason why we’ve seen slow progress on commitments being made to these terminals – especially early on in the permitting process.
The regulatory side is the main headache, however. The Deepwater Port Act of 1974 (“DWPA”) governs the licensing system for deepwater ports outside of US territorial waters. Certain conditions have to be met – including ensuring the impact on the marine environment is basically nil, following National Environmental Policy Act (“NEPA”) standards. Plans for both construction, operation, and even eventual decommissioning have to be outlined in detail before a license is given and construction can proceed. It’s arduous, and if readers think onshore permitting like pipelines or LNG terminals is tough, this is worse.
The final say rests with the U.S. Department of Transportation’s Maritime Administration (“MARAD”), which handholds throughout the entire process. Numerous other agencies are involved as well, including the Army Corps of Engineers, the Environmental Protection Agency, and the National Oceanic and Atmospheric Administration. While the bylines state that MARAD has a year from the date of an application to approve or deny, any time an agency requests additional information or things occur at an inter-agency level, that time period is on pause; time stops counting. Much of this deals with NEPA and the preparation of an environmental impact statement (“EIS”), which has a public commentary period and regulatory review, culminating in a comment period from the governor of the state that the project ties to and any of the federal agencies. If MARAD issues a license, construction has to follow the pitch to a tee, or the entire process gets derailed. From start to finish, we’re talking five years on a good day before the ground is ever broken.
Outside of SPOT, the other three terminals have not made any progress beyond the Draft EIS stage; that was late in 2021 for Bluewater and late in 2022 for Texas Gulflink. Blue Marlin has not even gotten that far. Remember that there is room for one, maybe two of these terminals in total. That’s been my view and the market’s view. Remember that all of these projects have largely been pitched with one-day loading capacities at or near two million barrels per day. While I don’t expect – and neither do the hopeful owners – to run that rate consistently loading up very large crude carriers (“VLCCs”) around the clock, remember that the United States exported 4.1mm barrels per day in 2023. Two of these terminals would effectively double theoretical export capacity, and it’s just unlikely that the Permian (and other oil-producing regions) could meet the call for production increases to justify more than one or two of these projects. Never mind whether the world can effectively digest that kind of production growth from the United States either, especially given the oil supply outlook over the balance of the decade coming from other locations.
Two Winners: SPOT and Blue Marlin
Me saying that SPOT, headed by Enterprise Products Partners L.P. (NYSE:EPD), is going to be the first to market is not a revelation to readers. Nor is it a wild opinion against the market. SPOT is leading the way on the permitting side, and while there have been some rumblings of challenges, Enterprise now has a deepwater port license in hand and can start work in earnest on finding a contractor, bringing in potential minority equity owners, and getting contractual agreements from counterparties to start the build.
Assuming a second oil export facility gets built, it is easy to point toward Texas Gulflink or Bluewater as the secondary winners. They are, after all, much further along in the permitting process. I don’t think that’s enough to get them across the finish line, and that’s where my opinion is different than the rest of the market.
Texas Gulflink is headed by Sentinel Midstream, a privately held firm. While they are further along in the permitting process than the three remaining proposals, I think the small size of its backers will be a major deterrent. Its proposed location also sits basically right next to SPOT, off the coast of Freeport. It would be fed by Houston pipelines, and while that network of pipelines is solid and offers a multitude of grades with spare capacity, Sentinel owns and operates basically none of the onshore infrastructure. There are a lot of buyers in Houston – refineries, traders, smaller export ports – and while there is amazing interconnectivity, I think the lack of power onshore is going to make counterparties more wary rather than having appeal as “independent”. I would have felt more comfortable if Exxon had been brought in as a joint venture partner, particularly given the deepening relationship between the two. Exxon’s Baytown refinery complex, which is fed via Wink to Webster which Exxon spearheaded but also third-party lines, looks positioned to be a big staging ground for export barrels. Sentinel has done some deals with them. But thus far, there has been not a peep of a joint venture between the two.
Bluewater is arguably the best when it comes to the owners. A 50 / 50 joint venture between Phillips 66 and Trafigura, Bluewater brings a skilled operator which already owns an offshore loading platform (the United Kingdom) and one of the largest oil traders in the world. Bluewater also has the most unique design (dual loading, no offshore platform) which has a lot of appeal in a vacuum even if it cannot load a VLCC as quickly as the others. But, Bluewater is positioned to be built offshore at Corpus Christi – already the premier crude oil export location in the United States. Gibson Energy’s South Texas Gateway and the Enbridge Ingleside Energy Center churn out nearly 40.0% of crude export volumes in the United States, with Corpus accounting for two-thirds of overall volumes. Pipelines coming into Corpus are already basically full, and the build of a project like Bluewater would necessitate some large-scale new builds on the pipeline side. With Corpus crude benchmarks already fetching a premium compared to Houston, any contractual counterparties would have to buy into the idea that midstream would solve this problem for them. I also have concerns that entrenched players (like Enbridge) in the Corpus energy market will try to delay Bluewater if they can – something that already seems to be occurring given Bluewater has been stuck in the same spot in the permitting process for more than two years. In September of 2022, Bluewater received a letter from the EPA indicating that the developers would need to ramp up their plans to minimize emissions of VOCs during the project’s operation. Later that month, Bluewater said it would rescind its original permit applications to add additional reduction measures, but the market has not heard anything new or seen revisions.
Energy Transfer LP (NYSE:ET) and Blue Marlin did not for their deepwater port license until October 2020, more than a year after the others. Despite the late start, Energy Transfer sees Blue Marlin as having unique advantages. Number one, the offshore portion of the piping already exists. It intends to repurpose its Stingray natural gas platform to include both oil and natural gas, creating savings. It would, unsurprisingly, use its onshore assets at Nederland where it has both significant inflows and ample acreage for expansion, as a staging ground. Nederland has amazing connectivity, not only with access to WTI and Canadian barrels but also from the Bakken (Dakota Access), Cushing (South Bow’s MarketLink, Enterprise / Enbridge’s Seaway), and the Gulf Coast (Genesis Energy’s CHOPS).
There’s some belief from major players in Blue Marlin. Despite the absence of a permit in hand, Energy Transfer already has an agreement – not a commitment, but an agreement – from TotalEnergies for 4mm barrels per month. Even Enterprise has not publicly announced any memorandums of understanding or commitments for SPOT. That’s equivalent to two VLCCs per month, but underscores the potential for TotalEnergies to be an anchor customer. Coincidentally, Nederland supplies nearby Port Arthur (TotalEnergies’ refinery), so excess purchased crude could be shipped and sold.
Having a key customer – even if SPOT comes through – provides a large advantage here. SPOT gobbling up contracts now would not be surprising, and that would pressure Texas Gulflink in particular heavily. Energy Transfer is the most likely of the remaining three to push and remain committed to pursuing its project even if SPOT moves forward. Plus, with Nederland already being heavily expanded (NGL export expansions, crude intake expansions) and Energy Transfer’s reputation for being more aggressive, I think they are likely to not be influenced by what Enterprise and SPOT have going on.
Midstream Flows, Takeaways
Today, Corpus Christi has a clear advantage because that area has the ability to almost fully load VLCCs, with only the last bit requiring lightering. Ingleside and East Texas Gateway have reaped the rewards of that, but SPOT and Blue Marlin would represent stiff competition. Rumors are that Ingleside and East Texas Gateway do not have long contract tenures, so there is a risk that those volumes could shift away from Corpus.
Remember that SPOT would be fed by lines terminating in Houston and Blue Marlin sits even further east, with feedstock coming in from primarily Energy Transfer controlled lines. It stands to reason that – particularly in the beginning if and when these facilities come online, flows could wane. That puts pressure on Enbridge’s Gray Oak and Plains All American’s Cactus I and Cactus II when it comes to publicly traded midstream companies.
Blue Marlin is the potential big surprise. I think investors are too focused on the regulatory timetable, with not enough emphasis on time to market (Blue Marlin is brownfield, not greenfield), progress on contracts, pipeline network, and just management aggression. Over 2025, expect to see progress made from Energy Transfer on the permitting side, with the exit of at least one of the other competing projects – particularly if SPOT reaches a final investment decision and gets worked into the Enterprise budgeting process.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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