In 2019, midstream players in the Permian Basin rushed to satisfy demand for pipeline capacity driven by booming oil and gas production. Many of the pipeline projects initiated in 2019 came online in 2020, including Enterprise’s 440-mile Midland to ECHO 3 pipeline and the Kinder Morgan Gulf Coast Express Pipeline. By the end of the year, crude oil takeaway capacity in the Permian stood at approximately 6.5 million barrels per day. However, demand for that takeaway capacity cratered in mid-March as a result of falling commodity prices resulting from the Saudi-Russia price war compounded by the collapse in energy demand resulting from the COVID crisis. Despite a gradual recovery in crude production, with additional forecasted recovery in 2021 if current crude oil prices remain stable or improve, new projects like the Wink-to-Webster pipeline (scheduled to come online in September 2021) will likely ensure that takeaway capacity outstrips demand for the foreseeable future, especially if upstream producers maintain the capital discipline that they have espoused in 2021 capital budget programs that were recently announced.  This overcapacity led to the cancellation or deferral of a number of high profile projects in 2020, including Enterprise’s Midland to ECHO 4 pipeline and MPLX’s Permian to Gulf Coast NGL pipeline.

In the realm of natural gas, capacity continued to outstrip supply in 2020, albeit by a much smaller margin due to comparatively robust gas prices, as well as increased gas to oil ratios from aging wells in the Permian. In 2021, two major gas pipeline projects are expected to increase takeaway capacity from the Permian Basin by roughly a quarter, as the Permian Highway and Whistler projects are expected to come online in March and September, respectively.  Commentators believe that these new pipeline projects coming online in 2021 will similarly exert downward pressure on both basis differentials and transportation prices of natural gas, absent a rapid market recovery.

The most notable midstream M&A activity occurred in July, when Dominion Energy agreed to sell its 7,700 miles of natural gas transmission pipelines and storage assets to Berkshire Hathaway for approximately $9.7 Billion, including debt.  The deal was pitched as a way for Dominion to focus on green energy and meet aggressive clean energy targets.  In conjunction with that divestiture, Dominion Energy and Duke Energy announced the cancellation of the Atlantic Coast Pipeline project “due to ongoing delays and increasing cost uncertainty which threatened the viability of the project” as they stated in their press release announcing the cancellation.  

To make matters worse for midstream operators, 2020 was generally not a great year for midstream operators in the courts.  A number of upstream producers filed for bankruptcy in 2020, and many of them sought to reject all or a portion of their midstream contracts (including the minimum volume commitments contained therein) and were markedly successful in doing so. Click here for a more fulsome analysis of recent bankruptcy court decisions related to midstream contract rejection.

Due to the above factors, 2021 for midstream companies is likely to be a year of low growth and increased free cash flow due to deferral or cancellation of major capital projects. Instead, midstream companies are likely to follow the same playbook that upstream companies plan to follow in 2021, emphasizing living within free cash flow, repayment of debt and return of capital to shareholders through stock buybacks or dividends.

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