Pipeline Expansion: Meeting the Growing Demand for Refined Products and Renewable Fuels

Market Demand for Refined Products and Renewable Fuels

Market demand for refined products and renewable fuels is driven by supply-demand dynamics, spot prices, and government policies. Companies like Phillips 66 and Marathon Petroleum highlight the influence of production levels and user demand, while Chevron and Valero Energy emphasize the impact of regulatory standards and Renewable Volume Obligations. ExxonMobil underscores the global balance of supply and demand affecting fuel prices.

"While marketing fuel and lubricant margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by trends in spot prices, and where applicable, retail prices for refined petroleum products in the regions and countries where we operate." --- (PSX, sec filing, 2024/Q1)

"The volume of refined products that we transport, store, distribute and market is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines and marine operations." --- (MPC, sec filing, 2024/Q1)

"And so we're pleased with both of these. There are markets, maybe to your point about economics that are in some ways heavily influenced by government policy, be it the renewable fuel standard and the Low Carbon Fuel Standard, which affect renewable fuels or some of the things in the investment or the inflation reduction act that affect hydrogen." --- (CVX, earning call, 2024/Q1)

"The RVO cost is calculated by multiplying (i) the average market price during the applicable period for the RINs associated with each class of renewable fuel (i.e., biomass-based diesel, cellulosic biofuel, advanced biofuel, and total renewable fuel) by (ii) the quotas for the volume of each class of renewable fuel that must be blended into petroleum-based transportation fuels consumed in the U.S., as set or proposed by the EPA, on a percentage basis for each class of renewable fuel and adding together the results of each calculation." --- (VLO, sec filing, 2024/Q1)

"Energy security is very important, so is affordability and availability. Prices at the pump are determined by the balance of supply and demand globally, not just one supplier. ExxonMobil is doing our part to efficiently supply the market." --- (XOM, event transcript, 2024/05/29)

Current Pipeline Capacity and Utilization Rates

Kinder Morgan operates approximately 82,000 miles of pipelines and 139 terminals, with significant natural gas storage and renewable natural gas generation capacities. The company is expanding its storage at the Markham facility and converting the Double H Pipeline to NGL service, indicating robust current capacity and strategic utilization enhancements.

"We own an interest in or operate approximately 79,000 miles of pipelines, 139 terminals, 702 billion cubic feet of working natural gas storage capacity and have renewable natural gas generation capacity of approximately 6.1 Bcf per year with an additional 0.8 Bcf in development." --- (KMI, press release, 2024/04/17)

"We own an interest in or operate approximately 82,000 miles of pipelines, 139 terminals, 702 billion cubic feet of working natural gas storage capacity and have renewable natural gas generation capacity of approximately 6.1 Bcf per year with an additional 0.8 Bcf in development." --- (KMI, press release, 2024/04/01)

"The rates on the notes were favorable compared to budgeted rates. Natural Gas Pipelines Construction is nearly complete on KMI's project to expand the working gas storage capacity at its Markham Storage facility (Markham) in Matagorda County along the Texas Gulf Coast." --- (KMI, press release, 2024/04/17)

"For the full year, we expect refined product volumes to be slightly below our plan about 1%, but 2% over 2023. Regarding development opportunities, the company plans to convert its Double H Pipeline system from crude oil to natural gas liquid service, providing Williston Basin producers and others with NGL capacity to key market hubs." --- (KMI, earning call, 2024/Q2)

"The Green River Pipeline will consist of approximately 43 miles of 20-inch pipeline and associated compression, providing approximately 150 million cubic feet per day (MMcf/d) of capacity from the basin to the Western Chipeta processing plant." --- (KMI, press release, 2024/07/17)

Regulatory and Environmental Challenges

Kinder Morgan faces multiple legal challenges related to environmental matters, but efforts to mitigate regulatory hurdles are underway. The potential overturning of the Chevron doctrine could positively impact regulatory deference, influencing the regulatory landscape for pipeline expansion.

"Multiple legal challenges have already been filed, including by us. See Note 10, “Litigation and Environmental— Environmental Matters — Challenge to Federal “Good Neighbor Plan, ” to our consolidated financial statements." --- (KMI, sec filing, 2024/Q2)

"Together, these decisions will help mitigate the regulatory barrage we've seen over the last couple of years.And with that, I'll turn it over to Tom to give you some details on our business performance for the quarter." --- (KMI, earning call, 2024/Q2)

"And in the interim, we've got a presidential election. The overturning of the Chevron doctrine, which gave deference to regulatory agencies when the law is not clear is also a positive." --- (KMI, earning call, 2024/Q2)

Technological Advancements in Pipeline Operations

Technological advancements in pipeline operations are being driven by differentiated technologies, process improvements, and innovations in gas infrastructure and carbon capture. Companies are focusing on enhancing capital efficiency, expanding system capabilities, and restoring pipeline pressures to meet growing demands and improve operational performance.

"Looking across our broad portfolio, it is clear that our three engines of growth, each with differentiated technologies and exciting project pipelines, are positioning us for continued performance across all time horizons." --- (SLB, earning call, 2024/Q1)

"- Capital efficiency : Maintain our capital expenditures at approximately 6% of revenue while focusing on technological advancements and process changes that reduce our manufacturing and maintenance costs and improve how we move equipment and respond to market opportunities." --- (HAL, sec filing, 2024/Q1)

"You highlighted the Master Gas System. And as you continue to see the shift towards gas, that gas infrastructure plays towards a lot more compression, plays towards also the pipelines that place towards a lot of the onshore power generation that's going to be necessary." --- (BKR, earning call, 2024/Q1)

"In terms of the future, continued ability to expand along system and ability to restore pipeline pressures on systems that have been derated over time due to population encroachment in the areas." --- (WMB, earning call, 2024/Q1)

"We see that, we will combine our strengths in technology deployment at scale in every basin in the world, combining this with the subsurface sequestration technology leadership we have to offer customers an all in capability from sequestration design execution to carbon capture, combining our technology with the technology of our carbon capture.We are very positive on this and we believe that, as this business will scale, as we will be in a position to add on many new innovation technology on it, this will result into margin expansion and into ability to extract a lot of value from this acquisition." --- (SLB, earning call, 2024/Q2)

Investment Trends in Pipeline Infrastructure

Investment in pipeline infrastructure is robust, with significant capital allocations from major players like Blackstone and Kinder Morgan. Blackstone reported $81 billion in recent investments, while Kinder Morgan emphasizes project-specific budgeting and approval processes to ensure sufficient returns. This indicates a strong, strategic focus on expanding pipeline capabilities.

"In addition, Crude and Condensate was unfavorably impacted by a decrease in equity earnings, excluding the impairment discussed above, from Double Eagle Pipeline LLC due to unfavorable recontracting partially offset by higher sales margin on our Bakken Crude assets due to increased marketing activities and an escalated rate on our KM Condensate Processing facility in the six-month period." --- (KMI, sec filing, 2024/Q2)

"We invested $25 billion in quarter one and $56 billion in the past two quarters with a strengthening pipeline of new commitments." --- (BX, earning call, 2024/Q1)

"The $13 million (15%) decrease and $57 million (62%) increase, respectively, in in Crude and Condensate was impacted in the 2023 six-month period only by a $67 million non-cash impairment related to our investment in Double Eagle Pipeline LLC, which decreased equity earnings, and which we treated as a Certain Item." --- (KMI, sec filing, 2024/Q2)

"BIP targets a diversified mix of core+, core and public-private partnership investments across all infrastructure sectors, including energy infrastructure, transportation, digital infrastructure and water and waste, with a primary focus in the U.S. BIP applies a disciplined, operationally intensive investment approach to investments, seeking to apply a long-term buy-and-hold strategy to large-scale infrastructure assets with a focus on delivering stable, long-term capital appreciation together with a predictable annual cash flow yield." --- (BX, sec filing, 2024/Q1)

"Budgeting and approval of expansion capital expenditures generally occurs periodically throughout the year on a project-by-project basis in response to specific investment opportunities identified by our business segments from which we generally expect to receive sufficient returns to justify the expenditures." --- (KMI, sec filing, 2024/Q2)

Financial Implications of Pipeline Expansion

Pipeline expansions, such as the Trans Mountain Pipeline, can influence crude oil differentials and refining capacity utilization, impacting financial outcomes. Additionally, Phillips 66's inorganic growth and asset sales in the midstream sector highlight strategic financial adjustments to optimize pipeline operations and investments.

"• Crude oil differentials have increased, consistent with typical seasonal patterns; however, continued sour crude oil production cuts by OPEC+ suppliers, the start-up of the Trans Mountain Pipeline expansion, and the return to high utilization of refining capacity following industry-wide refinery maintenance activity in the first quarter of 2024 may lead to a decline in such differentials." --- (VLO, sec filing, 2024/Q1)

"And so maybe we'll start with just sort of a high level question. The company has gone through a fair amount of change with some inorganic growth in the midstream side, the fold in of DCP, the acquisition of Pinnacle and then recently announced a sale on the REX pipeline." --- (PSX, conference, 2024/06/18)

Stakeholder Perspectives on Pipeline Projects

Stakeholders are optimistic about KMI's pipeline projects, highlighting specific expansions like the Texas Intrastate lateral and Altamont Egress. They are keen on the potential for higher returns from gas pipeline projects, despite challenges in financial projections. The Double H Pipeline conversion is seen as a promising opportunity for NGL services.

"We added an intrastate lateral project on the Texas Intrastate and we added a pipeline Egress project in Altamont, which is on the gathering and processing side. Keith Stanley: Got it. That was all from me. Thank you." --- (KMI, earning call, 2024/Q1)

"So, do you think that could translate into you earning higher returns than you've gotten historically on some of these potential gas pipeline projects, and is there any way to quantify that?" --- (KMI, earning call, 2024/Q2)

"We do not provide the portion of budgeted net income attributable to individual capital projects (the GAAP financial measure most directly comparable to Project EBITDA) due to the impracticality of predicting, on a project-by-project basis through the second full year of operations, certain amounts required by GAAP, such as projected commodity prices, unrealized gains and losses on derivatives marked to market, and potential estimates for certain contingent liabilities associated with the project completion." --- (KMI, press release, 2024/07/17)

"KMI reports second quarter 2024 financial results, including an opportunity to provide NGL service out of the Williston Basin through its proposed Double H Pipeline conversion project." --- (KMI, Twitter, 2024/07/17)

Future Outlook for Pipeline Expansion Projects

Kinder Morgan's recent pipeline expansion project, operational since November 2023, underscores the company's commitment to meeting growing demand. However, the build time for new pipelines remains a significant factor. With anticipated robust demand for natural gas, the future outlook for pipeline expansion projects appears promising.

"due to timing of revenue recognition associated with a prepaid customer contract; and (iv) on TGP, an increase in legal reserves and higher pipeline maintenance costs offset by higher revenues due to an expansion project that went into service in November 2023." --- (KMI, sec filing, 2024/Q2)

"Because of the build time, it's going to take some amount of time to get the pipeline into service." --- (KMI, earning call, 2024/Q2)

"While it's hard to peg an exact estimate of increased demand for natural gas, as a result of all this growth and the need for electric power, we believe it will be significant and makes the future even more robust for natural gas demand overall and for our midstream industry.And with that, I'll turn it over to Kim." --- (KMI, earning call, 2024/Q2)